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TMI Blog2016 (1) TMI 1260X X X X Extracts X X X X X X X X Extracts X X X X ..... law on the issue of claim of the assessee on working capital adjustments. X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; 2.12.by denying the benefit of a working capital adjustment while computing the ALP and thereby disregarding the law, international guidance and judicial precedents in this regard; 2.13. disregarding judicial pronouncements in India in undertaking the TP adjustment; 3. The Ld. DRP erred in disregarding the detailed arguments/ submissions put forth by the appellant during the course of the DRP/ assessment proceedings while passing its direction under section 144C of the Act; 4. The Ld. AO has grossly erred by proposing to compute interest under section 234B and 234D of the Act mechanically and without recording any satisfactory reasons for the same." 02. Ground no one of the appeal is general in nature and no arguments put forth before us for and against this ground, therefore same is dismissed. 03. Ground no two of the appeal is against the selection of comparables by TPO and upheld by DRP. At the time of hearing, Ld. AR of the assessee submitted that he does not press any other grounds except the grounds relating selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction with respect to contract Computer software development i.e. IT(CSD) and ITES using multiple year data selecting TNMM as the Most Appropriate method ( MAM) using Operating profit / total cost ( op/TC) as profit level indicator (PLI) for determining arms' length price of its transactions. In its T P study report assessee has benchmarked the above transaction whereas per TPO's order dated 09-01-2014 he has also taken some of the comparables which is tabulated as under :- As per T P Study report of assessee As per TPO Sr No International Transaction Number of comparables OP/TC Mean margin of comparables Number of comparables Mean margin of comparables 1 Provision of IT services 16 15.02 % 12.21% 13 25.17% 2 Provision for ITes 13 15.02 % 12.12% 9 30.45 % 08. Based on above, TPO proposed an adjustment of 21,647,857/- for software development services and ₹ 21,40,56,075/- for ITes services. On objection before DRP, vide its direction dated16.12.2014 where in DRP directed to exclude one comparable M/s Infosys limited to be excluded for software development services and arithmetical correction in case of comparables taken for ITes services. Ld. TPO pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not, ipso facto, lead to its exclusion from list of comparables for purposes of determination of ALP In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. 12. Now, We proceed to discuss each of the comparables contested as under and order accordingly:- 13. Persistent systems Limited a. TPO has taken Persistent Systems Limited (Persistent) which has a margin 29.02% as comparable holding that the company is engaged in software developing services. The ld DRP rejected the claim of the assessee for its exclusion. Before us, the ld AR submitted that this company is functionally different because it renders outsourced product development services and developed product as paxpro, ChemLMS etc. He further contended that segmental information of sale of software services and sale of product are not available and therefore it should be excluded. He relied on the decision of 3DPLM Software solutions Limited V 42 tamann.com 333 ( bang.) and Yadlee Infotech Pvt l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f profit and to cement his argument he submitted the Op/TC margins of the company showing 4.80 % in one year swinging up to 37% in a comparison chart for four years. Therefore this comparable should be excluded as per his submission. b. Ld. DR relied on the order of TPO and DRP. He further submitted that RPT percentage as submitted by the assessee were not raised before the TPO/ DRP and therefore for correctness of this figures the issue relating to this comparable should be set aside to the file of TPO for verification. c. We have heard both parties, perused material on record. We find that if the RPT is in excess of 25 % which is the filter set by TPO himself then this comparable fails that filter and therefore to be excluded. It is established principle that higher the RPT more vulnerable the Comparable is for exclusion. However, this contention was not raised before the TPO, as we did not find the same in order of TPO while discussing this comparable. Therefore, in the interest of Justice we set aside the issue of this comparable to the file of TPO to verify the contention of assessee that RPT in the case of this comparable is wrongly calculated. We order accordingly. 15. Wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected. It was also stated that 62% of the total asset of the company is intangible and therefore it should be excluded. b. Ld Dr relied on the orders of lower authorities. c. We have considered the rival contention, wherein it is stated the Zylog Systems Ltd is engaged in the sale of software service as well as its products and has operation in Wifi place and broadband connectivity. It is apparently an onsite service company. This is evident from the various comparables of only reports and related documents produced before us. Zylog System Ltd also undergone into the business of restructuring where it is clear Dugout fair flex matrix. Therefore, it is apparent that the company, which have undergone the business restructuring process during the year, cannot be held to be a comparable in view of the extraordinary circumstances. The company is also owning significant intangibles and carrying on research and development activities ownership significant intangibles cannot be held to be a comparable with the assessee and therefore on this ground too this comparable is ordered accordingly to be excluded. 17. Now we come to ITes segment of the assessee. S. No Name Of The Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rabad v. DCIT, Circle 2(2), Hyderabad (ITA NHo. 255/Hyd/2014 dated 31.7.2014), wherein M/s. Accentia Technologies Limited(Seg) was excluded by the Tribunal from the list of comparables on the ground that it was a case of mergers and acquisition, and the company was also found to be functionally different. b. LD Dr relied on the order of lower authorities and also submitted that all these reasons have been considered by TPO while selecting the comparables. c. We have considered the rival contention. During the year this comparable has been gone into substantial business restructuring resulting into extraordinary circumstances during the FY 2009-10 subsidiary of Ascentia got amalgamated with this company and the figures of the business results for the year ending 31st March 2010. In this case also excluded the figures of amalgamated company and due to which the comparable has high OP by TC margin. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No. 159/Hyd/2014 dated 31.7.2014); being relevant in this case, are reproduced below- "19.2 We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee which is low end ITES service provider such as which enables network management and other back office support services performed by assessee which primarily include remote monitoring and maintenance of Equant global network platforms and services, coordination, remote configuration, and implementation of quality customer networking solutions. Therefore this comparable is ordered for its exclusion accordingly. 21. Fortune InfoTech Limited, a. This comparable has a margin of 22.80% and before the TPO, it was submitted that the company has provided ITE services and therefore it is not compared with software development segment of the assessee. The DRP rejected the contention of the assessee holding that it was profile of the comparable is similar to the assessee and therefore before us the assessee has objected the inclusion of this comparable. According to the assessee, this company is engaged in web application, mobile application, web designing and SEO provider. Therefore, it is functionally different and should be excluded. b. Ld. DR relied on the orders of lower authorities c. We have carefully considered the rival contentions. We have heard both parties and carefully p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the assessee. Before us, the assessee submitted that comparable is engaged in high-end integrated services in improving the competitive position of their clients and manage their business process and providing value added services to them. Further, the Infosys also carrying huge brand value and therefore this comparable should not be taken. b. Ld DR Relied on the orders of lower authorities and stated that all the reasons have been considered by the TPO and DRP for inclusion of this comparable. c. We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high and integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly. 23. TCS E Serve International Ltd, a. This comparable was taken by TPO where the margin is 54.02%. The TPO has taken this comparable considered this a company in IPS industry and considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing too. It was further submitted that the company owns substantial intangible assets in form of software licenses and it makes a payment for Tata Brand and therefore it gets the benefit use brand value of Tata. b. Ld. DR relied on the orders of lower authorities and submitted that all the above reasons for selection of this comparable has bene considered by the TPO. c. We have also considered the rival contention for exclusion of TCS e-service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded. 25. The assessee has submitted that if appellant's contention regarding certain company would be considered, it does not press any other ground of the appeal therefore we have considered the various comparable of TPO has already direct to exclude some of them and one of the compa ..... 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