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TMI Blog2016 (3) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... ndering services. Assessee while contending that the said expenditure should not be excluded, made alternative contention that the same are to be excluded from total turnover. Following the Co-ordinate Bench decision in Tata Elxsi case [2011 (8) TMI 782 - KARNATAKA HIGH COURT ], the Ld.CIT(A) directed the same to be excluded from total turnover as well. Therefore, we uphold the same and reject Revenue’s grounds. X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal are interrelated. Revenue is mainly aggrieved on the RPT filter adopted by Ld.CIT(A) at 0% where as the Co-ordinate Benches have been accepting upto 15% and in some orders up to 25%. Depending on the facts of each case in each year, the RPT filter is being used / approved. Learned Counsel fairly admitted that Co-ordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06- 2015 ( Sunquest) has followed the other decisions on the issue and held that in various other cases companies having related party transaction upto 15% of total revenues can be considered. Considering the above, it was contended that the Revenue's Ground No. 2 may have to be allowed and the companies rejected by Ld.CIT(A) has to be reconsidered. At the same time, Learned Counsel also submitted that the companies which are functionally not similar, having RPT of more than 15% and high turnover cases require reconsideration and made various submissions on the issue. Ld. DR also made submissions on the filters of RPT, turnover etc., and comparability of each of the companies. 8. As a general proposition, various filters are required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctional dissimilarity. Consequently, each of the comparables selected by TPO is analysed for the sake of convenience, keeping in mind the grounds raised by Assessee and Revenue on these. 10. The final list of 17 companies selected by TPO are as under: Sl No. Comparables selected by TPO NCP Margins as per TPO Order (%) (WC-Unadj) NCP Margins as per TPO Order (%) (WC - Adj) 1. Bodhtree Consulting Ltd., 24.85 22.35 2. Lanco Global Systems Ltd., 13.65 9.51 3. Exensys Software Solutions Ltd., 70.68 62.85 4. Sankhya Infotech Ltd., 27.39 21.14 5. Sasken Network Systems Ltd., 16.64 14.02 6. Four Soft Ltd., 22.98 21.35 7. Thirdware Solution Ltd., 66.09 63.97 8. R S Software (India) Ltd., 8.07 6.79 9. Geometric Software Solutions Company Ltd., 20.34 17.75 10. Tata Elxsi Ltd., 24.35 22.77 11. Visualsoft Technologies Ltd., 23.52 20.10 12. Sasken Communication Technologies Ltd., 14.42 13.24 13. Igate Global Solutions Ltd., 4.32 2.43 14. Flextronics Software Systems Ltd 32.19 29.42 15. L&T Infotech Ltd., 10.33 8.56 16. Satyam Computer Services Ltd 29.44 26.94 17. Infosys Technologies Ltd., 42.83 4.96 Arithmetical Mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services". Considering the above, we direct that the above company has to be excluded on the reason of RPT of more than 25% and functionality. Lanco Global Systems Ltd., : 10.4. This company even though included by TPO and has not been objected to by Assessee, was rejected by the CIT(A) on the reason of low profit margin. This is not a valid ground. Only continuous loss making companies are being excluded from the comparability. If this argument was accepted, the high profit making companies are also to be excluded. This is not the purpose for which TP analysis is being undertaken. Therefore, keeping the principles laid down by the Special Bench of ITAT in the case of Maersk Global Centers (India) P.Ltd 43 Taxmann.com 100 Mumbai(SB), we, consider the same as comparable and retain it in the list. Sankhya Infotech Ltd., Thirdware Solution Ltd., & Tata Elxsi Ltd., : 10.5. These three companies are rejected as comparables on functionality in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business of software development. 20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies. 22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- "15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product developments. Since Assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDW ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables. 23. The learned D.R. however, supported the Orders of the authorities below. 24. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility. It was his submission that this company will however, have to be excluded as this company was held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005- 2006 order dated 12.2.2014. 28. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: "15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and Assessee's objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to Assessee software services and segmental information of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to Assessee." 29. Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services Pvt.Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee. 30. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies. "13. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , & L&T Infotech: 10.9. These two companies are found comparable in many orders of the Co-ordinate Benches, but excluded on the basis of turnover filter of ₹ 200 Crores limit in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra), we have considered the same. Assessee's turnover is about 63 Crores. The turnover of Igate Global Solutions Ltd., (Seg) is about 405 crores and L & T Infotech Ltd is of 562 Crores. This is with the range of ten times the upper limit. Moreover, Assessee Counsel has not pressed on turnover filter of ₹ 200 Crores. Therefore, these two are retained. Flextronics Software Systems Ltd.,: 10.10. This company was objected to on functional dissimilarity. This was considered in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as under: "26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessment year is 2003-04. Therefore, the amended proviso as explained above is not applicable to the present case in hand. The proviso applicable to the present case is the one which stood before the substitution brought in by the Finance (No.2) Act, 2009 with effect from October 1, 2009. The earlier proviso is extracted below: "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the Assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean". 63. The first limb of the old proviso and the first limb of the present proviso is regarding arriving at the arithmetical mean which is the same. There is no change with regard to that. The change is with reference to the second limb. The old proviso says that at the option of the Assessee, the Assessee may adopt a price different from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean, ie.., the Assessee has an option to claim the tax payer's marginal relief at 5 per cent with reference to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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