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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 ..... d 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 Rs. 42,20,130/- after claiming exemption u/s. 10A of the Act. During the assessment proceedings, the income of the assessee was enhanced to Rs. 5,68,15,190/- by virtue of addition of Rs. 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 Rs. 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 comparables. The assessee had applied following filters for selection of comparables:- i. Companies for which data is not available. ii. Sales < Rs. 1 crore and sales > Rs. 100 crore. iii. No operational Income. iv. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Appellant. The ld. AR of the assessee stated at the Bar that he is not pressing ground nos. 3, 4 and 5 raised in the appeal. Accordingly, all the above three grounds are dismissed as not pressed. 8. Ground No. 6 - Rejection of certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 5.56 crores and the expenditure towards remuneration and salaries paid to the employees is only Rs. 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 authorities below. On perusal of the directions of DRP we find that the assessee has raised objections (Ground of objection No. 6) with regard to rejection of certain comparable companies identified by the assessee as comparables. However, the DRP ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal 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. Asstt. CIT [2012] 22 taxmann.com 96/137 ITD 1 (Mum.) ii. Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 29 taxmann.com 310/140 ITD 540 (Bang.) iii. Net Hawk Networks India (P.) Ltd. v. ITO [2014] 41 taxmannn.com 250 (Mum.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcess 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 Rs. 36.89 crores against total sales of Rs. 131.27 crores and it had incurred RPT expenses of nil against total expenses of Rs. 107.58 crores. He computed the percentage of RPT to the total transactions at 15.40% by the following method: RPT sales divided by (total sales + total expenses) multiplied by 100 i.e., Rs. 36.89 crores divided by (Rs. 131.27 + Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany 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) fully covers the controversy. In the case of Symphony Services (supra), M/s. Kals Information Systems Ltd. was excluded from the list of comparables on the ground that the said concern was involved not only in the activity of providing of software development services but also in selling of soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording 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 learned counsel has referred to the decision of the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. v. DCIT vide ITA No.1386/PN/2010 dated 30.11.2011, which was also a concern engaged in rendering software development services for its parent company. The action of the TPO of selecting Kals Informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern 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. (supra) relates to the assessment year 2006-07 whereas the present case of the assessee is for assessment year 2008-09 yet there is no material on record to suggest that the activities carried out by Kals Information Systems Limited in the current assessment year are different from those noted by the Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 23359186 31108949 Operating Profit 5343950 12227877 5983623 -3069098 Operating Margin 32.55% 52.59% 25.62% -9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gies 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 of working capital employed by the Appellant and the comparable companies. Ground No. 10 - Adjustment for risk difference Erred in comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk adjustment for difference between the functional and risk profile or comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and levy of interest. As far as levy of penalty is concerned the issue is premature. As regards interest u/s. 234A, 234B, 234C and 234D is concerned, the levy of interest is consequential in nature. Therefore, this ground of appeal of the assessee is dismissed. 18. In the result, the appeal of the assessee is partly accepted in the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X
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