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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 ..... ntract Software Development ('CSD') services do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act') and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of : 2.1. not appreciating that none of the conditions set out in section 92C (3) of the Act are satisfied in the present case, 2.2.ignoring the fact that the appellant is entitled to tax holiday under section 20A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 2.3.disregarding the arm's length price ('ALP'), as determined by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/rejecting the filters applied by the appellant; 2.4. disregarding multiple year/ prior years 'data as used by the appellant in the TP documentation and holding that current year (i.e. Financial Year ('FY') 2009-10 data for comparable companies should be use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of hearing, Ld. AR of the assessee submitted that he does not press any other grounds except the grounds relating selection and rejection of comparables by TPO and DRP and working capital adjustment sought. In ground no two assessee has raised several sub grounds. These sub grounds are against issues that (a) provisions of section 92C (3) of the act are not satisfied, (b) assessee is enjoying tax holiday u/s 10A of the income tax act therefor it does not need to transfer its profits to AE and there is no motive in showing lesser income, (c) applicability of multiple year data instead of single year data, (d) application of inconsistent filters etc. In the synopsis filed by the assessee, it is also reiterated. Therefore, we restrict this appeal to those sub grounds of ground no. 2, which are relevant for individual comparables only and reject all other grounds. 04. During the course of hearing Ld AR of the appellant has assailed some of the comparables for reasons that they were functionally dissimilar and are having product lead revenues, extra ordinary events, different risk profile and application of wrong filters. 05. Facts apropos are that Equant Solutions India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfosys limited to be excluded for software development services and arithmetical correction in case of comparables taken for ITes services. Ld. TPO passed order pursuant to that direction by making an adjustment of Rs. 23,21,00,865/- to the income of the assessee. Against this assessee is in appeal before us. 09. Now we first consider software development services (CSD/ IT) segment. Assessee had selected TNMM for its TP study and had selected 16 comparables through a search done under prowess and capitaline database. Average PLI of these 16 comparables came to 12.21% and as per assessee and profit margin of 15.02% was above the mean margin of comparables. After the fresh search, assessee came out with 21 comparables out of which TPO rejected 14 comparables and included six more comparables rejected by assessee by applying accept/ reject matrix and therefore ultimately TPO chose 13 comparables out of which one comparable Infosys Limited was excluded by DRP and therefore finally 12 comparables remained for benchmarking. List of such comparables and their average PLI is as under S.no. Name of the Company Margin (OP/TC) 1 Akshay Software Technologies Ltd -1.07% 2 Evoke Technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 limited TS-465-ITAT 2014 ( bang.) b. Ld. DR Relied on the order of AO and submitted that AO has given sufficient reason for selection of this comparable. c. We have perused the arguments on the same. Firstly on perusal of the balance sheet of this comparable it is noted that that this company has not provided segmental information for sale of services and sale of products of software's. Further 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 engaged in contract software development services. We find that, as submitted by the assessee, the segmental details are also not available separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1/22 taxmann.com 96 (Mum.) that in the absence of segmental details/information a company it cannot be taken into account for comparability analys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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. Wipro technology Services Limited. a. TPO has included Wipro Technology Services Ltd having a margin of 73.35% and it has been upheld by DRP. Before us, the ld AR submitted that this company has huge related party transaction as company's total revenue is governed by master service agreement with CITI technology services Limited where the 100 % of the equity is owned by Wipro. Therefore, the entire revenue of this is much related party. It was further submitted that it has turnover of more than 24 times of the assessee and has huge brand value of Wipro and therefore it should be excluded. He further buttressed his claim of exclusion by submitting the volatile PLI of the company from 52.55 % to 80.81 % in a chart for three years. b. Ld. DR Relied on the order of TPO and DRP for the reason given for selection of this comparable. c. We carefully considered the rival contention regarding exclusion of this comparable. This company had agreed an agreement with CITI Technology Services Ltd, which is 100% subsidiary of Wipro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Margin (OP/TC) 1. Accentia Technologies Ltd. 42.52% 2. Cosmic Global Ltd. 18.28% 3. E4e Healthcare 31.03% 4. Fortune Infotech Limited 22.80% 5. Jindal Intellicom Limited 13.62% 6. Infosys BPO Limited 31.44% 7. TCSE-Serve International Ltd. 54.03% 8. TCSE-Serve Ltd. 63.42% 9. Microland Limited (IT Enabled segment) -3.11% Mean OP/TC 30.45% 18. Before us on this issue, AR of the appellant addressed limited argument for exclusion of following comparable in benchmarking PLI of its IT enables services such as network management and other back office support services. (a) Accentia Technologies Limited (b) Infosys BPO Limited (c) TCSE Serve international Limited (d) TCS E serve Limited 19. Now we discuss each of the comparables contested as under 20. Accentia Technologies Ltd. a. The TPO has taken this comparable stating that the company is functionally similar and passes by the filters applied by the TPO. The TPO further stated that the assessee has not demonstrated how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence 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 considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected." As pointed out by the learned counsel for the assessee, there was amalgamation of a company during the relevant year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 perused and considered the material on record. There is no dispute that the assessee is operating purely in the ITES sector providing services to its AEs, whereas comparable selected, by TPO has developed and owns its unique web based software by which it provides niche services to its customers. The issue of whether Fortune Infotech Limited is to be taken as a comparable with ITES entities having no intangibles of their own was considered in detail by the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) at paras 15.0 to 15.3.4 thereof. At para 15.3.4 of this order, the Tribunal held that this company; Fortune Infotech Limited requires to be excluded from the list of comparables observing that - "...On perusal of the details furnished and submissions made, it is seen that this company has developed its own software called "Finetran" and "image index" for performing specialized services in medical transcription and patient record management. On appraisal of the same, we are of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 it as a singled segment. The TPO was also of the view that there are no exceptional circumstances, which is related in the increase in the profit. Before DRP the argument of the assessee were rejected and it was held that far profile of the company is similar to that of the appellant. Before us it was submitted that in addition to BPO services this company is engaged in providing technical services like software testing, verification and validation of the software which falls under software development services activity, which also includes transaction processing, technical services, therefore it is functionally dissimilar. Further it was also contended that there is no segmental date ITES and software development activity of the company is available and this comparable owns substantial amount of intangibles in the form of software licenses and it owns Tata Bran in which company is making payment. It was further submitted that the company has volatile margin over the year and its profitability has gone up 173% on account increased in infrastruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of the appeal therefore we have considered the various comparable of TPO has already direct to exclude some of them and one of the comparable has been set aside to the file of TPO. We do not adjudicate all other these grounds of the appeal of the assessee and hence all other grounds of appeal and contention therein regarding the comparable are dismissed. 26. Accordingly we direct the AO/TPO to rework the average PLI of the comparables after considering our directions as above and thereafter make an analysis of the pricing of the international transactions of the assessee in the both the segments namely CSD/ IT and ITES segment. 27. Regarding the ground of working capital adjustment, Ld. AR contended that the assessee should have been granted working capital adjustment. Ld. TPO denied this on the ground that working capital according to him is relevant only where there is situation of o inventory and receivable and not in case of the service industry. He denied this because assessee has failed to demonstrate that difference in working capital deployed is making a difference in margin earned by the assessee and its comparables. 28. Before us AR of the assessee contended that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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