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TMI Blog2016 (8) TMI 1231X X X X Extracts X X X X X X X X Extracts X X X X ..... ustments u/s. 92CA of the Act amounting to ₹ 3,65,79,234/-. However, this order was revised by the Addl. DIT (TP) u/s. 92CA(5), wherein they have determined the revised assessment at ₹ 1,66,75,628/-. The Assessing Officer (AO) accordingly completed the assessment order. 2. Before the Ld. CIT(A), assessee has contested various filters, parameters and selection of comparable companies. Ld. CIT(A) after considering them in detail, however, found that there is no reason to interfere with the order of the Addl. DIT(TP) and accordingly, he rejected the contentions and TP adjustments. 3. Assessee had raised the following two grounds in its appeal: "2. The A.O. erred in adding an amount of ₹ 1,66,75,628/- as adjustment u/s. 92CA(3) of the Income Tax Act. 3. The TPO erred in determining the adjustment u/s. 92CA(3) at ₹ 1,66,75,628/- when in reality there was no such variance in the cross border transactions by the assessee with its associated enterprises". 4. Ld. Counsel at the outset submitted that TPO has selected 26 companies as comparables and out of them assessee has no objection for the first twelve companies. With regard to the balance 14 companies, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Application Services (P) Ltd., Vs. ACIT [157 ITD 897] * Four Soft Pvt. Limited Vs. DCIT [149 ITD 732] * M/s. Triology E-Business Software India Private Ltd., Vs. DCIT [140 ITD 540] * Curam Software International (P) Ltd., Vs. ITO [149 ITD 458] * App Labs Technologies Pvt. Ltd., Vs. DCIT [149 ITD 99] 5. Ld. DR while reiterating the contentions of the TPO, fairly admitted that many of the comparables are examined in the above said cases. 6. We have considered the rival contentions and perused the orders of the authorities. As can be seen from the orders the TPO has selected as many as 26 comparables in his study and proposed the adjustment. Even though assessee has raised many contentions before the Ld. CIT(A) about various filters etc., before us, Ld. Counsel restricted his objections to only selection of certain comparables which are already adjudicated as not comparable companies in similar cases. Assessee has no objection for the following comparables out of the 26 companies selected by the TPO. S. No Company Name Sale (Rs. Cr.) OP to Total Cost % 1. Datamatics Ltd 54.51 1.38% 2. E-Zest Solutions Ltd 6.26 36.12% 3. Geometric Ltd (Seg) 158.36 10.71% 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning to 809 pages. 6. At the outset, it has been fairly admitted that the comparables objected to in the list from Sl. Nos. 14 to 24 were already considered by the coordinate bench of this Tribunal in the case of United Online Software Development India Pvt. Ltd. in ITA No.1658/Hyd/2011 vide its order dated 24.9.,2015 for assessment year 2007-08. Learned counsel submitted that the assessee has raised the same objections with reference to the above comparables and requested for exclusion of the said companies taken as comparables Relevant portion of the order of this Tribunal dated 24.9.2015 in the case of United Online Software Development India Pvt. Ltd., is as under- "16. We have heard the arguments of both the sides and also perused the relevant material on record, including the paper-books and detailed filed by Assessee. It has been brought to our notice by the learned counsel for Assessee, and not disputed by the Learned Departmental Representative, that in assessee's own case for the assessment year 2006-07, the issue relating to comparable nature of three of the companies named in the original ground, viz. Megasoft Ltd., Infosys Technologies Ltd. and Tata Elxsi Ltd.(Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 78/H2011 c) Intoto Software India P. Ltd. ITA.2102/H/2010 d) Telcordia Technologies India P. Ltd. ITA.7821/Mum/2011 e) Triology E-Business Solutions ITA.No.1054/Bang /2011 f) Bearing Point Business ITA.No.1124/Bang/2011 g) LG Soft India Pvt. Ltd. ITA.No.1121/Bang/2011 h) Transwitch India P. Ltd. ITA.No.948/Bang/2011 i) Mercedes Benz Research & Development ITA.No.1222/Bang/2011 j) CSR India P. Ltd. ITA.No.1119/Bang/2011 k) First Advantage ITA.No.1086/Bang/2012 l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011 We herefore direct the Assessing Officer /TPO to exclude this while computing ALP. INFOSYS TECHNOLOGIES LTD., : 7.2 Objecting to the aforesaid company being treated as comparable, learned AR submitted that the company cannot be considered to be comparable to a captive service provider like Assessee, not only because of the quantum of revenue earned by them but also on account of various other factors. It was submitted that the company command a premium in the pricing of their products and services due to the goodwill, reputation and brand value. It was submitted that due to scale of operation it not only enjoy economies of scale in the lower c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as other relevant factors, the aforesaid company cannot be treated as comparable to Assessee in any manner. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as stated below as well as that of the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd.,[2013] 85 CCH 146. a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.1978/H2011 c) M/s. Virtusa (I) P. Ltd. ITA.No.1962/Hyd/2011 d) Telcordia Technologies India P. Ltd. ITA.7821/Mum/2011 e) Triology E-Business Solutions ITA.No.1054/Bang/2011 f) Adaptec (India) P. Ltd. vs. DCIT ITA.No.1801/Hyd/2009 g) Trinity Advanced Software Labs P. Ltd. vs. ACIT ITA.No.1129/Hyd/2005 We therefore direct the Assessing Officer /TPO to exclude this while computing ALP. ISHIR INFOTECH LTD 7.3. So far as this company is concerned, Assessee has sought exclusion of the aforesaid company on the ground that this company fails employee cost filter as its employee cost was only 3.96%. In this context, the learned AR has relied upon the decision of co-ordinate Bench of this Tribunal in case of M/s Virtusa (India) Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is that this is predominantly a product development company and margin from software development services is 23.11%. As can be seen, in case of M/s Virtusa (India) Pvt. Ltd. (supra), the Co-ordinate Bench of the Tribunal while considering Assessee's objection with regard to the aforesaid company had directed the Assessing Officer/TPO to take only segmental margin of this company for computing ALP. Similar view was also expressed in the following cases : a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.No.1978/Hyd/2011 c) Intoto Software India P. Ltd. ITA.2102/H/2010 d) Triology E-Business Solutions ITA.No.1054/Bang/2011 e) Telcordia Technologies India P. Ltd. ITA.No.7821/Mum/2011 f) Bearing Point Business ITA.No.1124/Bang/2011 g) LG Soft India P. Ltd. ITA.1121/Bang/2011 h) Transwitch India P. Ltd. ITA.948/Bang/2011 i) Mercedes Benz Research & Development ITA.No.1222/Bang/2011 j) CSR India P. Ltd. ITA.No.1119/Bang/2011 k) First Advantage ITA.No.1086/Bang/2012 l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Respectfully following the aforesaid orders of co-ordinate benches, we direct the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms length price for Assessee, hence, should be excluded from the list of comparable parties. " Following the decision of the ITAT Mumbai Bench as aforesaid and also considering the fact that the company itself in the information provided in response to the notice issued u/s 133(6) of the Act has admitted that it cannot be considered as comparable with other assessees, we direct exclusion of the aforesaid company from the list of comparables while determining ALP. WIPRO LIMITED : 7.7. While objecting to the aforesaid company being treated as comparable, the learned AR submitted that the TPO only on considering segmental details submitted by the said company for IT services, in response to notice issued u/s 133(6), has considered it as a comparable. It was submitted that the aforesaid company is a diversified company and discloses segmental information for IT services and products as one segment in its annual report. It was submitted that the TPO has not provided any other documents excepting segmental information obtained from TP report of Wipro, which is unaudited, manually corrected and unverified. It was submitted that Wipro is also considered to be a giant in its field ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to this company, the complaint of Assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of Assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. Assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system. (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development. (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/ CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. Assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by Assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son Information Tech Ltd., has been rejected by coordinate bench of the Tribunal in the case of M/s. Axsys Heathcare Ltd. vide order dated 28.5.2014 in ITA No.2076/Hyd/2011 for the assessment year 2007-08, for the following reasons- "14. After hearing rival contentions, we agree that the following comparables were excluded by the Coordinate Benches considering the similar facts and arguments raised before us: ........................... 3. High Turnover- functionally dissimilar: 6. FLEXITRONICS SOFTWARE LIMITED : " As far as Flexitronics 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 clearly demonstrate that there is functional dissimilarity between Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable nature of the above seven companies in similar matters and more particularly, the decision of the Tribunal in the case of Sumtotal Systems India Private Ltd. cited supra, including the decision rendered in assessee's own case for assessment year 2006-07, we allow ground No.7 of Assessee along with additional ground and direct the Assessing Officer to exclude the above eleven companies from the scope of comparability analysis." 6.1 Respectfully following the same, the Assessing Officer/Transfer Pricing Officer is directed to exclude the above companies form the list of comparable companies. Assessing Officer is directed to modify and redetermine the Arm's Length Price accordingly. Ground No.3(g) is accordingly allowed. 7.2. With reference to the Celestial Labs Ltd., the Co-ordinate Bench in ITA No. 1054/Bang/2011 (AY. 2007-08) in the case of M/s. Triology E-Business Software India Private Ltd., Vs. DICT dt. 23-11-2012 has considered as under: "(c) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- • In the Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06- 07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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