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TMI Blog2016 (9) TMI 1434X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover- also while computing the deduction u/s 10A of the LT. Act as the decision of the High Court is binding, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 3. The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 4. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 5. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal." 3. The issue that arises for consideration in this appeal is as to whether the DRP was justified in directing the AO to exclude telecommunication charges of Rs. 2,59,83,333 and travel expenses of Rs. 16,08,944 incurred in foreign currency fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is order dated 15.3.2013 passed u/s 92CA(5) r.w.s. 154 revised the adjustment to the ALP to an amount of Rs. 3,16,01,043. The Assessing Officer passed a draft assessment order u/s. 143(3) r.w.s. 144C of the Act, against which the assessee appealed before the DRP. The DRP issued directions u/s. 144C(5) of the Act. Aggrieved by the order of the DRP, the assessee is in appeal before us. 8. Though several grounds are raised in the appeal by the assessee, the ld. counsel for the assessee pressed for only grounds Nos.3 (a), (d) & ground No.7. Thus, the other grounds are dismissed as not pressed. 9. As far as ground No.7 is concerned regarding deduction u/s. 10A of the Act, this issue has already been considered by us while dealing with the revenue's appeal hereinabove, confirming the order of the DRP. Therefore, ground No.7 raised by the assessee on this issue is also dismissed. 10. Ground Nos. 3(a) & (d) raised by the assessee read as follows:- "3(a) The AO/TPO erred on facts in benchmarking the transactions of the 'limited risk' software services of the Appellant with companies operating as full fledged entrepreneurs, without considering the differences in the functions performed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. The 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 the 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 services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each of the companies. 8. As a general proposition, various filters are required to be adopted in selecting a company as a comparable. This is part of FAR analysis. However, there cannot be rigid rule or percentage fixed in adopting various filters. Generally, a turnover filter is adopted to avoid selection of high end companies (big companies) with that of 'minnows' in the similar line of business. How to adopt the filter depends on each case. Say for example, in the TP analysis of a company having 20 Crores receipts, a company with 2 Crores to 200 Crores can be stated to be within the range i.e., factor of ten as upper and lower limits. In certain cases, the ITAT also accepted turnover filter of 1 Crore to 200 Crores. But the range cannot be fixed, as the facts may vary from case to case. Simply a comparable can not be excluded on upper turnover limit when infact in number of cases. Assessees do not raise any objection on inclusion of companies with very small turnovers. The 200 Crores upper limit also cannot be considered in a case whose turnover is, say 300 Crores. Therefore, instead of a fixed 1cr - 200 Crore range, what one has to consider is the turnover/receipts of Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008- 09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08- 09 as far as this comparable company is concerned. Following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : ......................... ................................ 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is of Rs. 519 crores. Hence it was submitted that this company is not comparable with that of the assessee. (6) Larsen & Toubro Infotech Ltd. 11.6.1 It was submitted that this company is providing offshore operations but the comparable has majority of onsite revenue of 52.72% of the total revenue. It develops inhouse intangibles and owns intangibles of Rs. 2,253 lakhs for FY 2008-09. The turnover criterion is of Rs. 1,950.83 crores. Hence this company was sought to be rejected as a comparable. (7) Infosys Ltd. 11.7.1 It was submitted that Infosys Ltd. has brand related profits. It has brand earnings of Rs. 3,253 crores and owns significant intangibles. The onsite revenue is to the extent of 49.30% of total revenue. It had total turnover of Rs. 20,264 crores as against Rs. 40.36 crores of the assessee. It incurred sales and marketing expenses of 4.6% of the sales. Therefore, on these grounds, this company was sought to be rejected as a comparable. 12. In support of its contentions for rejection of the comparables viz., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Larsen Toubro Infotech Ltd. and Infosys Ltd., reliance was placed on the decision of this Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filter of lower turnover of Rs. 1 crore is without any reasonable basis and there is no filter for higher turnover also. The application of turnover filter also leaves much to be desired and has to no rationale basis. In our considered view, it is improper to proceed on the basis that the turnover of Rs. 1 crore to infinite is a reasonable classification as turnover base. 2. E-Gain Communication (P) Ltd. vs. ITO (2008) 118 TTJ (Pune) 354 : (2008) 13 DTR (Pune)(Trib) 65; 3. Sony India (P) Ltd. vs. Dy. CIT (2008) 118 TTJ (Del) 865 : (2008) 14 DTR (Del)(Trib) 228 : (2008) 114 ITD 448 (Del); 4. Dy. CIT vs. Indo American Jewellery Ltd., ITA No. 6194/Mum/2008 [reported at (2010) 131 TTJ (Mumbai) 163 : (2010) 40 DTR (Mumbai)(Trib) 386-Ed.]; 5. Philips Software Centre (P) Ltd. vs. Asstt. CIT (2008) 119 TTJ (Bang) 721 : (2008) 15 DTR (Bang)(Trib) 505 : (2008) 26 SOT 226 (Bang); 6. Asstt. CIT vs. NIT (2011) 57 DTR (Del)(Trib) 334 8.1 He further submitted that size as a criteria for selection of comparables is also recommended by OCED in its TP guidelines. The observation of OCED in para 3.43 of the chapter on guidelines reads as follows : "Size criteria in terms of sales, asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various Benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1 crore to Rs. 200 crores have to be taken as a particular range and the assessee being in that range having turnover of Rs. 8.15 crores, the companies which also have turnover of Rs. 1 to Rs. 200 crores only should be taken into conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, a held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun and Bradstreet is more suitable ad reasonable. In view of the same we hold that the turnover filter is very important and the companies having a turnover of Rs. 1 Crore to200 Crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 Crores, the companies which also have turnover of 1.00 to 200 Crores only should be taken into consideration for the purpose of making TP study". 5.12 The above view has been followed in the recent order of the Tribunal n the case of Trilogy E - Business(supra). The relevant findings of the Tribunal are extracted as under; "20. In this regard we find that the provisions of law pointed out by the learned counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies." ..... X X X X Extracts X X X X X X X X Extracts X X X X
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