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TMI Blog2018 (5) TMI 1381X X X X Extracts X X X X X X X X Extracts X X X X ..... re services provided to Associated Enterprises (" AEs") Rejection of transfer pricing documentation maintained 1. Rejection of the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules') and making an adjustment of Rs. 8,03,03,098 to the international transactions relating to provision of software services to its AE by undertaking a fresh economic analysis during the course of assessment proceedings. Rejection of use of multiple year data 2. Rejecting the use of multiple year data and using data for the FY 2009-10 only. Aggregation of distribution of software products with software services 3. Aggregating the international transactions of the following two business segments for determining the ALP of all the international transactions: * Software Development services and * Sales and Distribution services Use of additional filters 4. Inter-alia use of the following additional/modified filters in undertaking the comparative analysis and rejecting comparable companies having: i) Diminishing revenues; ii) Persistent losses; iii) Different financial yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rejected as not pressed. 3. As regards Ground No.5, brief facts are that the assessee company, a wholly owned subsidiary of Cordys B.V. Netherlands, providing software services primarily to its Associate Enterprises and is also an authorized distributor of Cordys Products in India., entered into international transactions of providing software development services, distribution of software products and reimbursement of costs by AE during the relevant financial year. In its TP study, the assessee had segregated the transactions relating to distribution of products and provision of software services and had conducted search for comparables separately in respect of these transactions. The TPO, upon analyzing the nature of the transactions, observed that the transactions are closely linked to the software development services provided by the taxpayer and therefore, the same are to be aggregated as provision of software development services for the purpose of TP study. The TPO observed that functional content of these two businesses is not significantly different to warrant separate economic analysis. Therefore, the TPO aggregated the transactions and carried out the analysis of soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved that foreign exchange fluctuation should not form part of the operating income of the assessee. 6. The learned DR, on the other hand, submitted that the foreign exchange gain or loss is part of the operating income and therefore, should be considered as operating profit or operating cost respectively and therefore, the DRP is justified in not accepting the assessee's objections. 7. Having regard to the rival contentions and the material on record, we find that the foreign exchange fluctuation loss is not abnormal only to the assessee. Such fluctuation would affect the margins of the comparable companies as well as long as the transactions are in the same currency. In a number of cases, we have already held that the foreign exchange fluctuation profit or loss is also part of the operating revenue. In fact, in the case of Honda Trading Corporation India Pvt. Ltd (Supra), the Coordinate Bench of the Tribunal at Delhi had considered the huge fluctuation in the foreign exchange in favour of Thai Bhat against the INR and it was in these circumstances, that the Tribunal had directed the AO to make necessary adjustments. The distinction of the currency in the international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices as the case may be. As against these activities of CompU Learn Tech, the assessee is into simple software development services. The Coordinate Bench of the Tribunal in the case of M/s. Wissen Infotech Pvt. Ltd in ITA No.99/Hyd/2015 for the A.Y 2010-11 has taken note of these dissimilarities to hold that it is different in line from the activities of the said assessee company and following the decision of the Coordinate Bench in the case of Pegasystems Worldwide Services (P) Ltd, and E-Infochips Bangalore Ltd, has directed the exclusion of the said company. Facts and circumstances of the case before us being similar, respectfully following the above decisions, we direct the AO to exclude this company from the final list of comparables. 11. As regards E-Infochips Bangalore Ltd is concerned, it is the case of the assessee that this company is also functionally dissimilar and its segmental data is not available, and therefore, it cannot be taken as a comparable. He also pointed out that there is an error in its margin computation as the bad debts should be included for computing the net margin under TNNM. He placed reliance upon the decision in the case of M/s. Kenexa Technologie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1.3. Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental I.T.A. Nos. 1758 & 1936/Hyd/14 Pegasystems Worldwide India Pvt. Ltd., :- 7 -: information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, we hold that this company is to be omitted from the list of comparable companies. With regard to DR submissions, he strongly submitted that in the case of M/s Virtusa India (supra), the matter was remitted back to the AO, in this case also, it should be remitted. We observe that the observations of the coordinate bench also that when the segmental data is not available, we cannot keep the company as comparable. In the present case also, there is no segmental data available on record. Hence, we do not find merits in the submissions of the DR". 14. Respectfully following the same, we direct the AO to exclude this company from the list of comparables. 15. As far as E-Zest Solutions Ltd is concerned, the contention of the assessee is that it is functionally different as it carrying on KPO services. After considering the rival contentions, we find from the financials of the said company (pages 40 to 54 of the Paper Book) that it is rendering the following services which covered the entire project development services: "E-Zest specializes in following key offerings covering entire product development lifecycle, including: Product Design & Development Product Feature En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10. 2.2 Ld. DR relied on the orders of revenue authorities and submitted as under: I) As per Pg. 22 of annual report, the company is engaged in the business of computer software. Hence, it is not functionally different. ii) As per segmental information, Page 23 of annual report, revenue is earned from application software and training. iii) As per age 21 of annual report, the inventories are in the nature of computer spares and not products. iv) Hence, this company cannot be rejected as a comparable. 2.3 Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "10.1. Assessee's main objection before us is on functionality of the comparable company. As seen from the annual report of 2008-09 and 2009-10 and comparative statement placed by Assessee, the company classified itself as 'the company engaged in development of software and software products since its inception' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10. 3.2 Ld. DR relied on the orders of revenue authorities and submitted as under: i)The company has two segments including software development services, which forms 89.52% of total revenues. ii) In response to notice u/s 133(6) the company has merely stated that it is engaged in SDS. iii) This company was considered as comparable in the AY 2008- 09, which the DRP has upheld. iv) Hence, this company cannot be rejected as a comparable. 3.3 Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "12.1. It was the objection of Assessee that above company is predominantly into product design services, Innovation Design Engineering and visual computing labs division which are specialized services. He referred to the order of ITAT in AY. 2009-10 in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this company was rejected on the reason that it is engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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." 3.5 In view of the above, in line with the decision of the various benches of this Tribunal, we direct the AO to exclude this company as comparable". 23 Respectfully following the same, we direct the AO to exclude this company from the final list of comparables. 24. As regards the assessee's ground of appeal No.7 seeking inclusion of the companies mentioned therein as comparables, we find that it would serve no purpose because if our directions above are given effect to, the margin of the assessee would be within +or-5% of the average margin of the comparables finally confirmed by us. Therefore, we see no reason to adjudicate the same at this stage and Ground No.7 is accordingly rejected. 25. As regards Ground No.8, it consists of three components; (a) for considering the provision of bad debts as operating expenses in computing the margins of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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