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TMI Blog2016 (6) TMI 1255X X X X Extracts X X X X X X X X Extracts X X X X ..... unds:- "On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the addition of Rs. 2,62,84,830, made by the Assessing Officer on the basis of the Transfer Pricing Officer's order under section 92CA(3) of the Act." 2. Brief facts are, the assessee an Indian company is a wholly owned subsidiary of GlobeOp Financial Services S.A., Luxemburg. Assessee is primarily engaged in the business of providing middle and back office service, fund administration for age fund, etc. Assessee also provides independent service essential to the launch and operation of private investment entities with activities ranging across and wide spectrum of traded instruments. During the relevant previous year, the assessee had entered into international transactions with its Associate Enterprise (A.E) abroad. For bench marking its international transactions, assessee had engaged independent external agency and transfer pricing study prepared by the said external agency was also submitted along with the return of income. As per the said transfer pricing study, the assessee classified its activities in two segments; (i) provisions of I.T. enabled serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.45%. As far as software development service segment is concerned, assessee submitted a list of 16 comparables with average mean of 11.68% as against assessee's margin of 15%. The Transfer Pricing Officer after considering the objections of the assessee selected a set of 13 companies as comparables with current year data in ITES segment and worked out the average operating profit to cost ratio of the comparable companies at 36.86%, as against 15% of the assessee which resulted in transfer pricing adjustment of ₹ 2,22,94,232. Comparable companies selected by the Transfer Pricing Officer with its profit margin is as under:- Sr. No. Name of Company NCP (OP/TC) 1. Ace Software Exports Ltd. 13.65 2. B N R Udyog Ltd. 17.12 3. Caliber Point Business Solutions 38.81 4. Cosmic Global Ltd. 18.75 5. Triton Corporation Ltd. 16.96 6. TSR Darashaw 11.78 7. CMC Limited TESC Segment 1.31 8. Goldstone Infratch Ltd. - BPO Segment 8.61 9. Datamatic Technology Ltd. 75.07 10. Saffron Global Ltd. 24.55 11. Tricom India Ltd. 45.60 12. Ultramarine Pigments Ltd. - ITES Segment 155.70 13. Vishal Information Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Solutions Pvt. Ltd. 6. Thus, the learned Commissioner (Appeals) retained 15 companies as comparable with average arithmetic mean of 17.32% as against the margin shown by the assessee at 15% thereby requiring no further adjustment to the price charged to the A.Es as far as software development service segments is concerned. Being aggrieved of the aforesaid order of the learned Commissioner (Appeals), the Revenue is in appeal before us. 7. We have considered the submissions of the parties and perused the material available on record in the light of relevant case laws. The dispute in the present appeal is confined to selection/rejection of comparables by the learned Commissioner (Appeals). Hereinafter, we will deal with the contentions of the parties in relation to selection/rejection of comparables under both the segments and record our findings. At first, we will deal with the Department's objections with regard to selection/rejection of the comparables in the ITES segment. ICRA ONLINE LTD. 8. Though, this company was selected by the assessee in its transfer pricing study, the Transfer Pricing Officer rejected it for the reason that it is a consistent loss making company. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority was not justified in considering the financials of subsequent assessment year while analysing the comparability of the company. As per rule 10B(4), contemporaneous data relating to financials of a company can be considered for comparability analysis. However, proviso to rule 10B(4) carves out an exception to the effect that in a case where data of the relevant year is not available in public domain then previous two years' data can be considered for comparability analysis. Thus, as could be seen, as per the statutory provision, either the current year's or previous two years financial result can be considered for computing the margin. Under no circumstances, data relating to subsequent assessment years can be considered for comparability analysis. Therefore, to that extent, the learned Commissioner (Appeals) was not justified in referring to the data relating to subsequent assessment years. However, on a perusal of the decision of the Hon'ble Delhi High Court in Chrys Capital Investment Advisors India Pvt. Ltd. v/s DCIT, [2011] 376 ITR 183 (Del.) relied upon by the learned Authorised Representative, it is noticed, the Hon'ble High Court referring to OECD guidelines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmark of 25% is applied. Therefore, since the revenue earned from ITES segment is less than 25%, the company cannot be considered as comparable. He submitted, learned Commissioner (Appeals) also while considering the comparability of the aforesaid company has relied upon financial results of subsequent assessment years which is against the statutory provisions. He, therefore, submitted, this company should be excluded from the list of comparables. 13. Learned Authorised Representative on the other hand submitted that there is no dispute to the fact that the company is functionally similar to the assessee. He submitted, only because the Transfer Pricing Officer assumes that its revenue from ITES segment is marginal, on that basis alone it cannot be excluded. The learned counsel drawing the attention of the Bench to the segmental results of the company submitted the revenue earned by the company is ₹ 21.90 crore which is more than the revenue earned by the assessee. Therefore, it cannot be excluded from the list of comparable. 14. We have considered the submissions of the parties and perused the material available on record. As could be seen the Transfer Pricing Officer has r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions of the parties and perused the material available on record. The fact that RPT of Data Matrix Technologies Pvt. Ltd. is 62% and that of Tricom India Ltd. is 58% has not been controverted by the learned Departmental Representative. As per the generally accepted norms, even followed by the Department a company having RPT of more than 25% is not treated as comparable. As this view is supported by a number of decisions of the Tribunal, there is no necessity to repeat them here. For the aforesaid reasons, these two companies have been rightly excluded from the list of companies. In fact. For this very reason, these two companies have not been considered as comparable in a number of decisions cited before us by the learned Authorised Representative. Therefore, respectfully following the consistent view of the Tribunal, we uphold the decision of the learned Commissioner (Appeals) on this issue. ULTRAMARINE PIGMENTS LTD. 19. When the Transfer Pricing Officer proposed this company as a comparable, the assessee objected stating that the company has reported abnormally high margin of 155.70% and the ITES segment of the company comprising of Lapiz Digital Services is also renderin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost has not gone up which is quite abnormal. Further referring to the director's report forming part of annual report, the learned Authorised Representative submitted that the growth recorded by the company compared to previous year is abnormal, hence, financial result cannot be relied upon. He, therefore, submitted the company had been rightly rejected as a comparable. 22. We have considered the submissions of the parties and perused the material available on record. Though, as it appears, the assessee had objected to the selection of the aforesaid company primarily for the reason that the ITES segment is engaged in providing engineering services and the company has shown abnormally high margin, however, the fact that it is functionally dissimilar to the assessee has to be establish on record. Further, the high profit earned by the company is as a result of certain extra ordinary circumstances also has to be established on record. Though, it may be a fact that in the assessment year 1996-97, the company might have indulged in some undesirable activities for which it might have been penalized, but, how far that can influence the acceptability or otherwise of the company in the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endor and does not provide ITES by itself. In this context, he observed that while the personnel cost of Vishal Information Technologies Ltd., is 1.38% of the total cost that of the assessee is 56.94%. He, therefore, held that the company cannot be treated as a comparable. 25. Learned Departmental Representative contesting the decision of the learned Commissioner (Appeals) in excluding Vishal Information Technologies Ltd. as a comparable submitted the company is functionally similar to the assessee. Only because it has outsourced part of its activity, it cannot be said that it is not comparable to the assessee. 26. Learned Authorised Representative on the other hand strongly supporting the decision of the learned Commissioner (Appeals) submitted, the company cannot be treated as a comparable not only because of the fact that it is providing technical services and developing I.T. solutions but also for the fact that almost entire ITES segment is outsourced to third party vendor. 27. We have considered the submissions of the parties and perused the material available on record. On analysis of facts placed on record, it is noticed that personnel cost incurred by Vishal Information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company is primarily engaged in software development services under various categories, hence, it should be accepted as comparable. 31. The learned Commissioner (Appeals), after considering the submissions of the assessee observed that as per business profile of the company mentioned in the annual report, it is engaged in software development services. On going through the financial statements as submitted in the annual report, the learned Commissioner (Appeals) found that the major portion of the revenue earned by the company during the relevant previous year is from software development services. He, therefore, held that the company being functionally similar is to be treated as a comparable. 32. The learned Departmental Representative referring to the annual report of the company submitted that the company is engaged in ongoing application maintenance which cannot be treated as software development services. He submitted, the company is also engaged in diversified activities which makes it incomparable to the assessee. 33. Learned Authorised Representative on the other hand reiterating the stand taken before the learned Commissioner (Appeals) submitted, the company being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. As could be seen, the Transfer Pricing Officer had rejected this company solely for the reason that its foreign exchange earning is less than 25%. However, the learned Commissioner (Appeals) has given a factual finding by referring to the annual report of the company that the entire software and service income is earned through exports. As the aforesaid factual finding of the learned Commissioner (Appeals) has not been controverted by bringing cogent evidence on record, we are unable to disturb the findings of the learned Commissioner (Appeals). ICRA TECHNO ANALYTICS LTD. 39. The Transfer Pricing Officer rejected this company by stating that the company is also engaged in software product and engineering services. Further, segmental information is not available. 40. Before the first appellate authority, it was submitted by the assessee that as per the information available in the data bases company primarily offers off-shore and outside development services. It was submitted, the term "Engineering Services" is widely used and essentially means software development and I.T. solutions. The learned Commissioner (Appeals) agreeing with the assessee that the term "Engineeri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent segment are not available. Challenging the rejection of this company before the learned Commissioner (Appeals) the assessee submitted that the company is primarily engaged in the business of development and customization which is based on information technology. The assessee also referred to annual report of the company to indicate that company is engaged in software development activities. 45. The learned Commissioner (Appeals), after considering submissions of the assessee in the light of facts and material on record observed that as per the director's report for the financial year 2004- 05 and 2005-06, the company is providing various kind of software development services, therefore, being of the view that the company is primarily engaged in the software development services, he treated it as a comparable. 46. Learned Departmental Representative relying upon the observations of the Transfer Pricing Officer submitted, as segmental details of the activities carried on by the company are not available in the annual report, it cannot be treated as comparable. 47. Learned Authorised Representative on the other hand submitted, as all services rendered by the company is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rised Representative on the other hand submitted the Transfer Pricing Officer has considered the sales at entity level and not segment-wise. Further, he submitted, as per the annual report, segmental details are not available. He, therefore, submitted that the company cannot be treated as a comparable. 52. We have considered the submissions of the parties and perused the material available on record. On a reference to the annual report of the company, it is noticed that it is engaged in the software development service as well as development of products and project management training and consultancy. Thus, as could be seen, it has three segments. Further, perusal of the annual report, reveals that there is no segmental reporting of revenue earned and expenditure incurred for each segment. It is also noticed that the Assessing Officer has taken the sales at entity level. For the aforesaid reasons, in our view, the company cannot be treated as a comparable. EXENSYS SOFTWARE SOLUTIONS LTD. 53. Though, the assessee objected to the selection of the aforesaid company on the reason that it is mainly into products and consultancy, further it had abnormal gain on account of amalgamation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct development. Considering the aforesaid fact in a number of cases, different Benches of the Tribunal have excluded this company from the comparability analysis. In this context, we may refer to the following decisions:- i) DE Shaw India Software P. Ltd. v/s ACIT, 54 Taxmann.com 407; ii) ADP P. Ltd. v/s DCIT, 62 Taxmann.com 352; iii) CNO IT Services India P. Ltd., 43 Taxmann.com 231; and iv) Textron Global Technology Centre P. Ltd., 56 Taxmann.com 465. 59. Facts being identical, respectfully following the consistent view of the Co-ordinate Bench of the Tribunal, we uphold the decision of the learned Commissioner (Appeals) on this issue. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. 60. Before the Transfer Pricing Officer, the assessee objected to selection of the company as a comparable stating that it is engaged in diversified activities, no break-up of revenue earned is available and company owns substantial trade-marks which indicate its into product development. The Transfer Pricing Officer, however, rejected the claim of the assessee. 61. When the matter came up before the learned Commissioner (Appeals), accepting assessee's claim, the learned Commissioner (Appeals) held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mann.com 465. 66. We have considered the submissions of the parties and perused the material available on record. In our view, considering the nature of activities of Infosys Technologies Ltd., its brand value size, economy of scales, ownership of intangibles, it cannot be considered as a comparable to a captive service provider like the assessee. Judicial opinion on the issue of treating Infosys Technologies Ltd. as comparable is consistent in holding that Infosys Technologies Ltd. being a giant company with diversified activities cannot be treated as a comparable to small company. The decisions relied upon by the learned Authorised Representative also support this view. In view of the aforesaid, we uphold the rejection of Infosys Technologies Ltd. as comparable. SANKHYA INFOTECH LTD. 67. The assessee objected to the selection of this company as a comparable stating that it is engaged in diversified activities segmental details are not available and revenue earned is predominantly from software product. Though, the Assessing Officer rejected the objections of the assessee but the learned Commissioner (Appeals) having found merit in the submissions of the assessee held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Pvt. Ltd., 64 Taxmann.com 110 and Textron Global Technology Centre Pvt. Ltd., 56 Taxmann.com 465, for the same assessment year i.e., 2005-06, the Tribunal has held that Satyam Computer Services Ltd. cannot be treated as a comparable for non-reliability of financial data, as it was involved in financial scam. The aforesaid reasoning also applies to the facts of the assessee's case. That being the case, we agree with the learned Commissioner (Appeals) that Satyam Computer Services Ltd., cannot be treated as a comparable. THIRDWARE SOLUTIONS LTD. 74. Though, before the Transfer Pricing Officer, the assessee objected to inclusion of this company on the ground that it is primarily engaged in development of software products but the Transfer Pricing Officer rejecting the objections of the assessee, included it as a comparable. 75. The learned Commissioner (Appeals), however, on a perusal of the annual report of the company for the current financial year as well as two previous financial years and analysing the details of revenue earned by the company found that it carries out activities in the nature of trading/resale of software products. Further, he also observed that the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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