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TMI Blog2016 (1) TMI 1321X X X X Extracts X X X X X X X X Extracts X X X X ..... an operating profit margin of 12.86% on cost. For the purpose of transfer pricing documentation it had considered 36 comparable cases and selected most appropriate method the 'TNMM'. It arrived at operating margin of 12.06% based on 3 years data. The matter was referred to TPO for determining the ALP in respect of IE. TPO conducted fresh analysis and using only current year's data selected 20 comparables wherein arithmetic mean operating profit margin was arrived at 20.67% on cost. Allowing working capital adjustment of 1.55% he determined the ALP at 19.12% and consequent ALP at 119.12% on operating cost. The TPO vide order dated 30.10.2009 determined the value of IE at Rs. 23,80,70,631 as against the price shown by assessee at Rs. 22,56,66,318, thereby, enhancing by an amount of Rs. 1,25,04,313. Assessee prepared objections before DRP which were rejected on the T.P. issues. On the consequential order passed by A.O, the present appeal is preferred. 4. Assessee filed concise grounds with additional ground raised as under : "Concise Grounds 1. The order passed by Dispute Resolution Panel is liable to be set aside as a non speaking order. 2. The appellant submits that the Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Appellant (viz. INR 22.55 Crores) for FY 2005-06. Accordingly, the following companies cannot be compared to the Appellant on application of turnover filter of INR 200 Crores. Sl. No. Name of the Company Turnover (In Crs.) Margin as per TPO 1. iGate Global Solutions Ltd., 527.91 15.61% 2. Infosys Technologies Ltd., 9028 40.38% 3. Mindree Consulting Ltd., 448.79 14.67% 4. Persistent Systems Ltd., 209.18 24.67% 5. Sasken Communication Ltd., 240.03 13.90% 6. Flextronics Software Systems Ltd., 595.12 27.24%" 5. We have heard Ld. Counsel for the assessee and the Ld. D.R. for Revenue. It was primarily submitted that most of the comparability issues were considered and analysed by the Coordinate Bench in the case of United Online Software Development (India) P. Ltd., Hyderabad vs. ITO, Ward 3(2), Hyderabad in ITA.No.1500/Hyd/2010 dated 20.06.2014 and mostly covered. However, we have examined the issues company-wise and decided as detailed hereafter. 5.1. The TPO final selection of cases are as under : Sl.No. Company Name OP to Total Cost % 1. Aztec Software Limited 18.09 2. Geometric Software Ltd (seg.) 6.70 3. Infosys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te any intellectual property for its own. The intellectual property generated belongs to the customer and not to the service provider. The taxpayer falls in this category. Thus comparables are also to be chosen from companies whose significant activities (> 75% of the operating revenues) are in the nature of or relate to software development services." As can be seen from the above extracted portion, the TPO has himself mentioned that a pure software development service provider does not generate any intellectual property for its own. He has further stated that, the companies which sell their products generally on license basis wherein the right to use the software is transferred without giving source code cannot be comparable to pure software development service provider like assessee. It is the specific contention of the learned AR that Accel Transmatic Ltd., has sold IP rights for the software developed by it. Further, it is also the contention of the assessee that this company fails the RPT filter of more than 25% applied by the TPO himself. In case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), the ITAT Bangalore Bench while examining the issue of comparability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areful consideration to the submission made on behalf of the Assessee. We find that the TPO has dra wn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.06.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITA T has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the 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. c/T 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfo Systems Ltd., and Accel Transmatics Ltd. are to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal. It is ordered accordingly." Facts being materially same and since it pertains to the same assessment year, following the view adopted by the ITAT, Bangalore Bench in the aforesaid case, we are also of the view that this company cannot be comparable to the assessee. For the very same reasons, II. KALS Info. Systems Ltd. also cannot be a comparable to the assessee. We, therefore, direct the AO/TPO to exclude the aforesaid companies from the list of comparability analysis. III. Megasoft Ltd. i. Objecting to the aforesaid company being treated as comparable, the learned AR submitted that as per the information obtained from the said company u/s 133(6) of the Act, the annual report of the company clearly indicates that it is also engaged in selling of products, namely, XIUS suit of packaged products. It was submitted that since segmental financial results in respect of product and services are available in respect of this company, if at all this company is to be treated as comparable, the TPO may be directed to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Hyd/2012) 4. Trilogy E Business Services Software Ltd. Vs. DCIT (ITA No. 1054/Bang/2011 - Para 20) 5. Agnity India Technologies Vs. ITO (ITA No. 3856/Del/2010) 6. Agnity India Technologies Pvt. Ltd. Vs. ITO (High Court decision) ITA No. 1204/2011 7. Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010) (AY 2006-07 8. Cincom Systems India P. Ltd., Vs. ACIT (ITA No. 761/Del/2012 (AY 2006-07) 9. Adobe Systems India Pvt. Ltd. (TS-320-ITAT-2011 (Del.) 10. Virtusa India Pvt. Ltd., Vs. DCIT (ITA No. 1962/H/2011) 11. Intoto Software India Pvt. Ltd. (ITA No. 1196/H/2010) ii. The learned DR, on the other hand, supported the orders of the DRP & TPO. iii. We have heard the parties and perused the materials on record as well as decisions relied upon by the learned AR. Undisputedly, the TPO has accepted the fact that the assessee is purely a software development service provider to its AE whereas Infosys is not a captive service provider like assessee. It is a fact that Infosys is engaged in diversified activities and also engaged in development of products consultancy and solution. That apart, the size, reputation and brand value of Infosys, in no w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above in para 6.2. 6.4. Ground No.2(f) is on the issue that proper opportunity was not given to the assessee by TPO in show cause and DRP failed to examine the ground-7 raised before them. However, this becomes academic as the assessee has not made serious objections before DRP and in many cases the comparables were examined and accepted. In the case of Megasoft Ltd., this Bench also considered and gave direction to consider only segmental profit in para 6.2 above. Therefore, we are of the opinion that no useful purpose would be served even if the matter is referred to TPO for giving an opportunity, considering that considerable time has since passed and many of the companies were thoroughly examined in many other cases so far as A.Y. 2006-07 is concerned. The ground is accordingly rejected. 7. Assessee contends that the comparable stated in additional ground should be rejected on turnover basis. Assessee's turnover is about Rs. 22.55 crores. Out of these companies objected is in additional ground, we have already considered Infosys Ltd., (list-2 in ground) and rejected on various other reasons as well. With reference to the other five companies, two companies viz., Persistent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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