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TMI Blog2016 (1) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... of the judgment of Hon'ble Delhi High Court in the case of Crhyscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 417/232 Taxman 20/376 ITR 183, level of margins of profit could not be considered as a criteria for exclusion while arriving at a list of comparables. 4. Per contra Ld. AR submitted that Exensys Software Solutions Ltd, which was excluded by the CIT (A) for a reason that one Halool India Ltd, was amalgamated with the said company during the relevant previous year resulting in the exceptional performance. Further as per the Ld. AR, the said company was engaged in the business of BPO services and segmental result were not available. 5. We have perused the orders and heard the rival contentions. Before deciding on the issue raised it would be appropriate to cull out the facts relating to the case. Assessee, an off-shore development centre had international transactions with its AE during the relevant previous year in the software development segment. Though it had revenue also from Bio informatics Division, there was no related party transactions in the said segment. Assessee had filed TP documentations alongwith its return of income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 457.45 32.19 70(15%) 24.91 5.45 15. L&T Infotech 562.45 10.33 Nil 46.8 8.32 16. Salyam 3464.2 29.44 Nil 67.1 1.94 17. Infosys 6859.7 42.83 212(3%) 254.07 3.7 Avg. 26.59% 3.59% 5.17% 8. On the arithmetic mean PLI of 26.59% of the comparables, AO made a negative working capital adjustment of 3.49% and arrived at adjusted arithmetic mean PLI of 23.10%. Though the assessee had sought for a risk adjustment citing that it was providing services to a single customer, TPO was of the opinion that the business environment of the assessee as well as its comparables did not have significant differences, warranting any such adjustment. As per the TPO assessee could not show how market risks borne by the comparable enterprises had an effect on their profits and had also failed to quantify the risk adjustment. TPO thereafter computed the shortfall u/s. 92CA of the Act, as under: Arm's Length Price; Operating Cost Rs.12,06,21,350/- Arm's Length Margin 23.10% of the Operating Cost Arm's Length Price @ 123.10% of operating cost Rs. 14,85,84,882/- Price received Rs. 9,71,81,643/- Shortfall being adjustment u/s. 92C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the decision of a coordinate bench of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) and directed exclusion of companies having turnover in excess of Rs. 200 crores from the list of comparables. By virtue of this direction above mentioned companies went out of the list of comparable. 13. Now before us, Ld. DR strongly assailing the order of CIT (A) placed strong reliance once again on the decision of Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors (India) (P.) Ltd. (supra). According to her, AO had made an analysis of the turnover of various companies and came to a conclusion that there was no linear relationship between the turnover and profits. When the comparables were doing similar functions as that of assessee, turnover could not be considered as a criteria for exclusion, according to her. 14. Per contra, Ld. AR strongly supporting the order of CIT(A) submitted that coordinate bench of this Tribunal not only in the case of Genisys Integration Systems (India) (P.) Ltd. (supra) but in a host of other subsequent decisions held that turnover filter as set out in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght by the assessee. 19. Ld. AR submitted that out of the comparables selected by the TPO, M/s. Flextronics Software Systems Ltd. M/s. L & T Info Tech Ltd., iGate Solutions Ltd., and M/s. Infosys Ltd. went out on application of turnover filter. Insofar as Bodhtree Consulting Ltd. was concerned, as per the Ld. AR, coordinate bench of this Tribunal in the case of Dy. CIT v. Kodiak Networks India (P.) Ltd. IT(TP) Appeal No. 532 (Bang.) of 2013 and CO. 119/Bang/2015, dated 30.07.2015 had held that M/s. Bodhtree Consulting Ltd. was not a proper comparable in the software development segment. As per the Ld. AR the said decision was for the very same assessment year viz., 2005-06, and the segment considered was also very same. 19.1 Per contra, Ld. DR submitted that assessee's profile actually showed that it was into product development and not software development services. 20. We have perused the orders and heard the rival contentions. Decision of the coordinate bench in Kodiak Networks India (P.) Ltd. (supra) has considered the comparability of Bodhtree Consulting Ltd., with Kodiak Networks India (P.) Ltd. (supra), Kodiak Networks India (P.) Ltd. (supra) was also providing softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Ltd. : As far as this company is concerned, the submission of the learned counsel for the assessee was that this company made extraordinary profits during the previous year: Our attention was drawn to the fact that the operating profit/operating cost of this company jumped from 17% for FY 2007-08 to 56% in FY 2008-09. It dipped in FY 2009-10 to 40% and in FY 2010-11 it became (-) 2% and 5% in FY 2011-12 and finally touched (-) 9% in FY 2012-13. Our attention was drawn to the fact that the Special Bench of the Tribunal, Mumbai, in the case of Maersk Global Centres (India) P. Ltd., in ITA. 7466/Mum/2012, dt. 07.03.2014 for AY 2008-09 had an occasion to consider the question as to whether companies having abnormal profits should be excluded as a comparable. The Special Bench took the view that it has to be shown that the high profit margin does not reflect the normal business conditions and only in such circumstances, high profit margin companies can be excluded. Our attention was drawn to the DRP's observation in its order on the issue which is as follows: "Bodhtree: The assessee has objected to selection of this entity on the basis of following objections: * The entity ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be sufficient to show that the margin reflected of this company does not reflect the normal business condition. 15. The learned DR placed reliance on the reason given by the DRP in its Order. 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had on occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspect held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special Bench held that in such cases it would require further investigation to ascertain the reason for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook the same pleading as he took in the case of M/s. Bodhtree Consulting Ltd. 24. We have perused the orders and heard the rival contentions. In the case of Kodiak Networks India (P.) Ltd., this Tribunal at paras 29 to 31 of its order held as under : Sankhya Infotech Limited ('Sankhya') '29. It was submitted by the learned counsel for the assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below. (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:- SILICONTM LMS (Training Management Information - SILICONTM QT (Online Assessment System) - SILICON ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if the has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continuously on product developments. Since assessee is in the product development having I.P. rights, the same is not comparable. 15.5 THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT. Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6 These three comparable above. Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under: 23. The other companies which are objected to by the assessee are Flextronics Software Limited. Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs. 23. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 24. In view of the aforesaid decision, we do not find a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt services segment in his T.P. analysis and assessee's objection is the software development services segment itself comprises of three sub-services namely (a) product design services (b) design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22: 22 Tata Elxi Limited : As regards this company, the learned Counsel appearing on behalf if the assessee, filed before us the reply of Tata Elsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and by virtue of turnover filter it had to be excluded. Further as per the Ld. AR its financial statements were not reliable. 39. Ld. DR made the very same submissions as for Bodhtree Consulting Ltd. 40. We have perused the orders and heard the rival contentions. This Tribunal in the case of ITO v. Sunquest Information Systems (India) (P.) Ltd. [IT Appeal No. 299 (Bang) of 2015], relied on by the Ld. AR, had held that the financial results of M/s. Sathyam Computers Ltd. was not reliable. Same view was taken by the Delhi Tribunal in the case of Agnity India Technologies (P.) Ltd. v. ITO [IT Appeal No. 3856/Delhi of 2010] which was confirmed by the Delhi High Court on appeal by the Revenue. We are therefore of the opinion that M/s. Sathyam Computers Ltd. has to be excluded from the list of comparables. Ordered accordingly. 41. In the next ground assessee has pleaded for inclusion of the following comparables as proper ones. As per the Ld. AR assessee had sought of inclusion of such comparables before the CIT(A), but he had not considered it : Sl. No. Name of the Company Operating Margin on Cost Adjusted Margin on Cost 1. Gensys International Corporation Limited -18.42% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the assessee and AE did not guarantee any specific quantum of business. However as per TPO the risk borne by independent enterprises was more considering the vagaries of market condition. In our opinion assessee could not show how it was eligible for any risk adjustment. AE had assured a particular cost + margin. Just because funds required for the infrastructure was given by the parent company or because the agreement with the parent company was for a long-term would not mean that assessee was bearing any significant risk more or less than the comparables which were selected. In such a situation we are of the opinion that TPO was justified in not giving any risk adjustment especially since a scientific quantification was not attempted by the assessee in its TP documentation. We do not therefore find any merit in the ground raised by the assessee for giving any margin for risk adjustment. 45. Before parting with, it will be inappropriate if we do not point out that Revenue has not taken any grounds against the RPT filter of 0% applied by the CIT (A) which has been mentioned at page 29 of his order. Nevertheless we have considered that 15% RPT filter would be appropriate in re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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