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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 ..... nctionally dissimilar with that of assessee need to be deselected from final list. X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm's length price (ALP) to the extent of ₹ 4,51,80,222. The final set of comparables selected by the TPO is as under:- Sl No. Name of the comparable Sales (in Rs.) Cost (in Rs.) Margin 1 Kals Information Systems Ltd. 2,14,04,686 1,87,93,813 13.89% 2 Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd. 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.81% 9 Mindtree Ltd. (seg) 7,93,22,79,326 5,74,06,63,058 5.52% 10 Larsen and Toubro Infotech 19,50,83,831,374 15,64,12,76,626 24.72% 11 Infosys Ltd. 2,02,64,0000,000 1,39,17,00,00,000 45.61% Average mean 24.32% 7. Further the TPO in his order dated 15.3.2013 passed u/s 92CA(5) r.w.s. 154 revised the adjustment to the ALP to an amount of ₹ 3,16,01,043. The Assessing Officer passed a draft assessment order u/s. 143(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany has been considered as not comparable to a pure software development services company by the Bangalore "Bench of the Tribunal in the case of Trilogy e-business Software India (P.) Ltd. (supra). The following were the relevant observations of the Tribunal:- (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here as the Co-ordinate Benches have been accepting upto 15% and in some orders up to 25%. Depending on the facts of each case in each year, the RPT filter is being used / approved. Learned Counsel fairly admitted that Coordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 ( Sunquest) has followed the other decisions on the issue and held that in various other cases companies having related party transaction upto 15% of total revenues can be considered. Considering the above, it was contended that the Revenue's Ground No. 2 may have to be allowed and the companies rejected by Ld.CIT(A) has to be reconsidered. At the same time, Learned Counsel also submitted that the companies which are functionally not similar, having RPT of more than 15% and high turnover cases require reconsideration and made various submissions on the issue. Ld. DR also made submissions on the filters of RPT, turnover etc., and comparability of 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that this company is in the business of software products and engaged in providing open and end to end web solutions, data warehousing, software consultancy and design & development of software using latest technology. It is a product company. It has abnormal growth of 67% over previous year on account of launch of its product, MIDAS. The business promotion expenses was to the extent of ₹ 11.16 lakhs. In view of the above, it was submitted that this company is not comparable with that of the assessee. Reliance was placed on the decision of M/s. CISCO Systems (India) Pvt. Ltd. (supra) wherein Bodhthree Consulting Ltd. was held not to be regarded as a comparable. The relevant observations of the Tribunal at para 26.1 are as under:- "26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee'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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Tribunal at para 26.4 & 26.5 held that Tata Elxsi Ltd. should not be regarded as a comparable. The relevant observations are as follows:- "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the co-ordinate Bench of this Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra), we direct that Tata Elxsi Ltd. be excluded from the final list of TPO's comparables. (4) Sasken Communication Technologies Ltd. (Seg) 11.4.1 The ld. counsel for the assessee submitted that this company is not functionally comparable since it has different functional profile i.e., product company and focus on R&D and hardware. It incurred losses on impairment of assets and business restructuring expenses. It owns intangibles, 23 in US and 8 in India. Its turnover criterion is ₹ 405.31 crores. Reliance was placed on the decision of this Tribunal in the case of M/s. Yodlee Infotech Pvt. Ltd. v. ITO, IT(TP)A No.108/Bang/2014 dated 12.12.2014 at para 20 of the order. (5) Persistent Systems Ltd. 11.5.1 It was submitted that this company is engaged in providing licensing of products and sale of products. It has revenue from export of services and products. This company is engaged in outsourced product development services for independent software vendors and enterprises. The income includes both software services and product sales and segmental details are not available. It owns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paras-8 to 09 of its order; 8. According to learned counsel for the assessee size is an important facet of an enterprise level difference. He submitted that comparables should have something similar or equivalent and should possess same or almost the same characteristics. To use a simile, he submitted that a Maruti 800 car cannot be compared to Benz car, even though both are cars only. He submitted that unusual pattern, stray cases, wide disparities have to be eliminated as they do not satisfy the test of comparability. Companies operating on large scale benefit from economies of scale, higher risk taking capabilities, robust delivery and business models as opposed to the smaller or medium sized companies and therefore, size matters. Two companies of dissimilar size therefore, cannot be assumed to earn comparable margins and this impact of difference in size could be removed by a quantitative adjustment to the margins or price being compared if it is possible to do so reasonably accurately. He submitted that size as one of the selection criteria has also been approved by various Benches of the Tribunal, in the following cases : 1. Dy. CIT vs. Quark Systems (P) Ltd. (2010) 132 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lecting a comparable of uncontrolled companies and the assessee has accordingly, applied the turnover range of ₹ 1 crore to ₹ 200 crores based on Dun and Bradstreet's analysis. He submitted that in the alternative, the categories recognized by NASSCOM may also be applied in selecting comparables. 8.3 The learned Departmental Representative rebutted this argument and submitted that the Act or Rules does not provide for the turnover filter. He submitted that as rightly pointed out by the TPO in the case of service sector, the size of the company does not matter because, the infrastructure layout is very less and it will not affect the profit ratio in any way. He drew our attention to the particular portion of TPO's order wherein the TPO has the reasoning given for rejecting the turnover filter. 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bangalore Bench of the Tribunal in the case of M/s Genisys Integrating Systems (Ind.) Pvt.Ltd., Vs DCIT ITA No.1231/Bang/2010 relying on Dun and Bradstreet's analysis had held that turnover range of ₹ 1 Crore to 200 Crore is appropriate. The said proposition has followed by the earlier Benches of this Tribunal in the following cases: (i) M/s Kodiak Networks (I) Pvt. Ltd., Vs ACIT - ITA No.1413/Bang/2010 (ii) M/s Genisys Microchip(I) Pvt. Ltd., Vs DCIT ITA No.1245/Bang/2010 (iii) Electronic for Imaging Indi Pvt.Ltd., -ITA No.1171/Bang/2010 & (iv) M/s Trilogy E-Business Software India Pvt.Ltd., Vs DCIT - ITA No.1054/Bang/2011 dated 23.11.2012. 5.1.1 In the case of M/s Genisys Integrating Systems (Ind.) Pvt.Ltd., Vs DCIT (supra) relying o Dun and Bradstreet' has observed as under; "9………we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 293.74 Crores 5) Sasken Communication Tech.Ltd., 343.57 Crores 6) Tata Elxsi Ltd., 262.58 Crores 7) Wipro Ltd., 961.09 Crores 8) Infosys Tech.Ltd., 13149 Crores" Accordingly, we have no qualms in directing the TPO to exclude M/s Tata Elxsi Ltd., M/s Sasken Communication Pvt. Ltd., M/s Persistent System Ltd., M/s L&T Infotech Ltd. and M/s Infosys Tech.Ltd., from the selected comparables. This Tribunal in the case of 3DPLM Software Solutions Ltd Vs DCIT (IT(TP) A.1303/Bang/2012 dated 28-11-2013) had also held that Persistent Software Systems Pvt.Ltd., was in product designing services and into software product development. In the same decision it was also held that M/s Infosys Technologies Ltd, had considerable intangibles like IPR, and was into software product development. It was also held that M/s Tata Elxsi Ltd., was developing niche products and into product designing services. Hence, these companies would in any case have to be excluded from the comparables being functionally different." 12.2 Further, this Tribunal in the case of M/s. Unisys India Pvt. Ltd. (supra) with regard to the comparables viz., Infosys Ltd. and Persistent Systems Ltd., on the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e direct that Persistent Systems Ltd., be excluded from the final list of comparable companies chosen by the TPO." 12.3 Following the decisions of the Tribunal in the case of Yodlee Infotech Ltd. (supra) and Unisys India Pvt. Ltd. (supra), we direct that Sasken Communication Technologies Ltd. (seg), Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd. be excluded from the final list of TPO's comparables. 13. With respect to the other comparables viz., Akshay Software Technologies Ltd., R S Software (India) Ltd., Zylog Systems Ltd. and Mindtree Ltd., the ld. counsel for the assessee has submitted that these comparables chosen by the TPO have been accepted by the assessee. 14. To summarise, the assessee has objected to the inclusion of 7 comparables out of 11 chosen by the TPO as comparable companies on the basis of functional dissimilarity and turnover criterion and these 7 comparables have been directed to be excluded from the final list of TPO's comparables in the foregoing paragraphs. Accordingly, we direct the AO/TPO to recompute the ALP after exclusion of the 7 comparables. 15. In the result, the assessee's appeal is allowed for statistical purposes. 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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