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TMI Blog2015 (12) TMI 1753X X X X Extracts X X X X X X X X Extracts X X X X ..... works Corporation (SNC), USA. The assessee exports its entire output to its parent company (SNC) on Cost + 10% mark up. The assessee has its establishments in the approved Software Technology Parks located at Pune and Bangalore. Hence, the assessee is entitled for the benefit u/s. 10 of the Act. The assessee filed return of income for the assessment year 2007-08 on 29-10-2007 declaring its income at ₹ 42,20,130/- after claiming exemption u/s. 10A of the Act. During the assessment proceedings, the income of the assessee was enhanced to ₹ 5,68,15,190/- by virtue of addition of ₹ 5,25,95,056/- on account of adjustment made to arm's length price of International Transactions with Associated Enterprises (AE). 3. During the period relevant to the impugned assessment year the assessee had entered into International transactions for rendering software development services with its AE to the tune of ₹ 31,30,40,056/-. To benchmark the same, the assessee adopted CPM method. The TPO after examining the documents submitted and the benchmarking done by the assessee in respect of international transactions rejected the same. The assessee had originally selected 27 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions pertaining to provision of software development services to the AE. Ground No. 2 - Rejection of transfer pricing analysis conducted by the Appellant Erred in rejecting of the economic analysis conducted by the Appellant and rejecting the comparable companies indentified by the Appellant in the TP Study. The ground Nos. 1 and 2 raised in the appeal are general in nature and thus, requires no adjudication. 7. Ground No. 3 - Eligibility under section 10A of the Act : Erred in ignoring the fact that since Appellant is availing tax holiday under section 10A of the Act, there is no intention to shift the profit base out of India, which is one of the basic intentions of the introduction of transfer pricing provisions. Ground No. 4 - Use of single year data Erred in not considering multiple year data for determining the arm's length price Ground No. 5 - Use of additional filters/modification of filters Erred in inappropriately introducing additional filters (selection criterias) and modifying the filters adopted by the Appellant and therefore, inappropriately rejecting certain comparable companies and determining inappropriate companies as comparables to the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that Object One Information Systems Ltd. is engaged in software development, media business, internet TV etc. The segmental information for software services is not available in respect of the said company. Therefore, the company is not functionally comparable. In respect of Quintegra Soutions Ltd. the ld. DR contended that the company is engaged in management, product engineering, enterprise solution such as SAP, testing and validation, technology consulting, etc. The company has diversified activities. Segmental analysis for software development services is not available. In respect of Synfosys Business Solution Ltd. the ld. DR submitted that company is engaged in product development in the areas of mobile security and health care. Moreover, the total expenses of the company during the year are ₹ 5.56 crores and the expenditure towards remuneration and salaries paid to the employees is only ₹ 22 crores. Therefore, the company is not a good comparable. The ld. DR vehemently supported the findings of the TPO in rejecting the aforesaid companies. 10. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts. In case of software services no inventory is generated. Therefore, the said company cannot be considered as a good comparable. The ld. AR further submitted that Kals Information Systems Ltd. has been rejected as comparable by the Tribunal in the following decisions:- i. SunGard Solutions (India) (P.) Ltd. (supra) ii. PTC Software (India) (P.) Ltd. (supra) iii. Barclays Technology Centre India (P.) Ltd. v. Asstt. CIT [2015] 56 taxmann.com 386 (Pune) 11.2 In respect of Avani Cimcon Technologies Limited the ld. AR submitted that the company is not a good comparable as it is functionally different. The said company developed software products named 'DXchange' and 'Carma'. The company would have earned revenue from sale of said softwares in the market. Whereas, the assessee is providing R and D facilities to its holding company only and is not engaged in development of software to be sold in the open market. In the absence of segmental details Avani Comcon Technologies Limited cannot be considered as a comparable entity. To support of his submissions the ld. AR placed reliance on the following decisions:- i. Telcordia Technologies India (P.) Ltd. v. Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eshold limit of 25% adopted by the TPO was inappropriate, it has been submitted before us that even after applying the filter adopted by the TPO, the aforestated two concerns are liable to be excluded as they have related party transactions in excess of 25% of the total transactions. It has been pointed out that the RPT percentage has been wrongly calculated by the TPO and for that matter it referred to the detailed submissions made in this regard to the DRP which are placed at pages 815 - 816 of the Paper Book. 12. In this connection, we find that the TPO defined the RPT filter to mean that in cases where the RPT transactions exceed 25% of the total transactions, the same are liable to be excluded for the purposes of comparability analysis. The TPO further decided to compute the limit of 25% of RPT transactions with reference to the appropriate base, which was either sales or total operating expenses, as the case may be. In para 6.3.2. of his order, the TPO has noticed in relation to FCS Software ltd that the said company had sales revenues from related parties of ₹ 36.89 crores against total sales of ₹ 131.27 crores and it had incurred RPT expenses of nil against to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of comparability analysis." In the present case the assessee is seeking rejection of Compucom Software Ltd. from the list of comparables on the ground of excessive RPT. Respectfully following the decision of Co-ordinate Bench, we direct the Assessing Officer/TPO to exclude the said company from the list of comparables. 13.1 As far as Kals Information Systems Limited is concerned the contention of the assessee is that it is functionally different. The assessee is engaged in software research and development solely for its AE. Whereas, Kals Information Systems Limited is engaged in development of software and software products. The Tribunal in the case of Barclays Technology Centre India (P.) Ltd. (supra) excluded the said company from the list of comparables being functionally different. The relevant extract of the findings of the Tribunal are reproduced here-in-under:- '18. Thirdly, assessee has contended that the concern M/s. Kals Information Systems Ltd. be excluded from the final set of comparables. On this aspect also, the case set up by the assessee is that the decision of the Pune Bench of the Tribunal in the case of Symphony Services Pune Pvt. Ltd. (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprises as well as to the non-associated enterprises and, was not involved in development and sale of software products. The TPO did not accept the plea of the assessee for the reason that the Annual Report of the said concern did not reflect about sale of software products after development and therefore, according to him, it was not functionally different. 14. Before us, the learned counsel for the assessee has vehemently pointed out that the plea of the assessee has been rejected by the income-tax authorities without any justifiable reasons, as even on the basis of the information available in the public domain it is quite evident that Kals Information System Limited was a concern which was developing and selling software products, which was an activity quite distinct from the activity of software development undertaken by the assessee. In the course of hearing, the learned counsel has furnished the prints out from the Annual Report of Kals Information Systems Ltd. wherein various software products sold by the said concern have been detailed, which according to him, supports the plea of the assessee that the said concern was functionally different. Apart therefrom, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems Limited. In the aforesaid two precedents, the said concern has been sought to be excluded from the list of comparables on account of functional dissimilarities. The Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) has considered the functions undertaken by the said concern during the previous year relevant to the assessment year under consideration before us, and it has been found that the said concern was engaged in the business of developing and selling software products and was not purely or mainly a software service provider. There is no dispute to the fact position that the appellant before us has undertaken mainly software development services for its associated enterprises and the non-associated enterprises and that such activity is quite distinct from the developing and selling of software products. The Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) has also found the said concern to be functionally dissimilar from a concern which was engaged in the business of software development services, which is the case before us. Though, the decision of the Tribunal in the case of Bindview India Pvt. Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 FYs 06-07 FYs 07-08 FYs 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the assessee with regard to arbitrary selection of the companies as comparable entities. The assessee had purportedly suggested the following companies to the TPO for including in the list of comparable entities: (1) Akshay Software Technologies Limited. (2) Maars Software International Ltd. (3) Melstar Information Technologies Ltd. (4) VMF Software International Ltd. A perusal of the order of TPO, as well as the DRP shows that there is no reference of the aforesaid companies in the order. No reason whatsoever has been given for not considering the aforesaid companies in TP study. We, accordingly, deem it appropriate to remit this issue back to the file of TPO for considering the aforesaid companies and pass speaking order thereon accepting/rejecting the said companies as comparable entities, provided the assessee has furnished the data of said companies with a request to consider the same during the pendency of proceedings before TPO in first round. This ground of appeal of the assessee is allowed for statistical purpose in aforesaid terms. 15. Ground No. 9 - Adjustment for working capital :- Erred in not granting any adjustment on account of difference in level ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the issues raised by the assessee in mechanical manner. In view of the fact that the issues raised in ground nos. 9 and 10 of the appeal have not been properly adjudicated by the DRP, the same are remitted back to the DRP for fresh adjudication, in accordance with law. Thus, both the grounds i.e. ground nos. 9 and 10 of the appeal are allowed for statistical purposes. 16. Ground No. 11 - Applicability of 5 percent variation from mean of comparable margins : Erred in computing the arm's length price of software development services as the mean arm's length price determined without taking into account the lower 5 percent variation from the mean arm's length price determined. The ld. AR submitted that ground no. 11 is academic and is not left with much merit if the above grounds are adjudicated. Accordingly, this ground of appeal is dismissed as not pressed by the ld. AR of the assessee. 17. Ground No. 12 - Penalty proceedings and levy of interest : Erred in initiating penalty proceeding under section 271(1)(c) of the Act and levying interest under sections 234A, 234B, 234C and 234D of the Act. The ground no. 12 of the appeal relates to the penalty proceedings an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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