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TMI Blog2015 (12) TMI 1675X X X X Extracts X X X X X X X X Extracts X X X X ..... he I.T. Act. 3. As regards ground No.3 is concerned, we find that though the Ld. Counsel for the assessee has argued on merits of the exclusion of these expenses from the export turnover for the computation of deduction under section 10A of the Act, we are inclined to accept the alternative contention of the assessee that if this expenditure is excluded from the export turnover, then the same should also be excluded from the total turnover for the purposes of computation of deduction under section 10A of the I.T. Act. We find that this alternate prayer of the assessee is covered by the decision of the Hon'ble Karnataka High Court in the case of CIT vs. M/s. Tata Elxsi Ltd., and others reported in 2011-TIOL-684- HC-Kar. Respectfully following the same, we direct the A.O. to compute the deduction under section 10A of the Act by excluding the internet expenses both from export turnover as well as total turnover. Ground No.3 of the assessee is accordingly treated as allowed for statistical purposes. 4. As regards ground No.2, we find that there are around 10 sub-grounds thereunder and all against the T.P. adjustment made by the A.O. in accordance with the T.P. order under section 92C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he comparables at 11.3%. Since the assessee's margin of 16.95% on operating cost was within + or - 5% of the average margin of the comparable, the assessee treated the transaction as at arms length. The TPO however, rejected the assessee's T.P. study and proceeded to make a search for comparables and after considering the assessee's objections to the comparable companies proposed by the TPO, the TPO arrived at the final comparables as follows : Sl. No. Name of the Company Operating Revenue (Rs. Cr.) OP to Total Cost % of RPT over sales. % of exports over sales. Onsite Revenue (%) % of R&D over sales % of market over sales. Emp. Cost (%). 1. Avani Cincom Technologies 2.93 21.65 8.08 100.00 0.00 0.00 1.20 63.52 2. Bodhtree Consulting Ltd 10.42 19.14 0.00 96.15 0.00 0.00 1.06 58.00 3. Celestial Biolabs 20.21 87.94 0.00 91.00 0.00 0.00 5.34 38.61 4. e-zest Solutions Ltd., 7.66 28.95 0.00 94.74 0.00 0.00 0.89 65.37 5. Flextronics (Aricent) 956.20 8.07 5.67 95.80 17.45 0.00 1.15 63.20 6. iGATE Global Solution Ltd., 786.90 13.90 17.82 100.00 50.14 0.00 0.54 58.41 7. Infosys 15677.00 40.41 7.78 98.60 50.90 0.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Ltd., is concerned, he submitted that this company is functionally different and also RPT filter. As regards Bodhtree Consulting Limited, the Ld. Counsel for the assessee submitted that this company is engaged in data cleansing services and is not engaged in software development services and therefore, is functionally different. He has submitted that all these companies have been considered as not comparable to software development services company such as the assessee, in the case of NTT Data India Enterprise Application Services P. Ltd., in ITA.No.1862/Hyd/2012 dated 02.01.2015 for the very same A.Y. 2008-09 as well as in the case of 3DPLM Software Solutions P. Ltd., ITA.No.1303/Bang/ 12 for the A.Y. 2008-09 by the decision of ITAT, Bangalore Tribunal. The Ld. Counsel for the assessee has also filed copies of the above decisions before us. 6. The Ld. D.R. on the other hand, supported the orders of the authorities below. 7. Having considered the rival contentions and the material on record, we find that the Coordinate Bench of this Tribunal in the case of NTT Data India Enterprise Application (cited supra), has recorded the following reasons for exclusion of the following comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td in ITA no 7633/Mum/2012 dt 06.11.2013 by ITAT Mumbai Bench 'K' and this is also to be excluded. For the sake of record, the findings of various companies decided by the Coordinate Benches of Tribunal (supra) are as under : 1. "Avani Cincom Technologies Ltd., 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 29 of the order of the Tribunal is reproduced here under : 29.1 The Id Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 5. KALS Information Systems Ltd., : 10.4. We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails 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, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 7. Thirdware Solutions Ltd 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 services and product development are not given separately. Further, as pointed out by the learned Authorised Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal referred above, and other cases relied on, we hold that the aforesaid 8 companies have to be excluded from the list of comparables chosen by TPO". 7.2. Further, the Ld. Counsel for the assessee is seeking exclusion of the following companies also for the following reasons : a) Persistent Systems Ltd., is engaged in product development and design services and No separate segmental details available. b) Quintegra Solutions Ltd., is engaged in product engineering services and in proprietary software products and has undertook substantial R & D activities during the relevant financial year. It was submitted that during the relevant financial year, there were peculiar economic circumstances such as acquisitions. It was also submitted that Quintegra Solutions Ltd., holds intangibles such as Trademark, registrations for products. c) Softsol Ltd., is both functionally different as well as fails RPT filter as held by the Tribunal in the case of 3DPLM. 7.3. We find that the facts and circumstances before us are similar and are for the very same A.Y. both in the case of the assessee company as well as NTT Data India Enterprise Application Services P. Ltd., (cited supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 18. Quintegra Solutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onomic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration, the RPT is 18.3% and therefore this company requires to be omitted from the list of comparables. 19.2. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables as this company was a pure software development service provider like the assessee. 19.3. We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 has excluded this company from the set of comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2011. As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the coordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand." 7.4. Therefore, respectfully following the decisions of the Coordinate Bench of the Tribunal (supra), we direct that these compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter to the file of TPO/A.O. for reconsideration as to whether these companies are comparable to the assessee. Needless to mention that the assessee shall be given a fair opportunity of hearing. Ground No.2 is accordingly allowed for statistical purposes. 11. The assessee has also raised an additional ground that the TPO has erred in making a negative working capital adjustment of -3.84% while computing the adjustment under section 92CA of the Income Tax Act, 1961. Since it is a legal ground, it is admitted and adjudicated as under. 11.1. It is the contention of the Ld. Counsel for the assessee that the Tribunal in the case of Adaptec India P. Ltd., has held that negative working capital adjustment should not be made in the case of captive service provider, while computing the adjustment under section 92CA of the Act. The Ld. Counsel for the assessee has filed copy of the decision of this Tribunal in the case of Adaptec India P. Ltd., wherein at page No.20 at para-11 of the order such a direction was given by the Tribunal. 12. Having regard to the rival contentions, we deem it fit and proper to remit this issue also to the file of the TPO for reconsideration in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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