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TMI Blog2016 (9) TMI 1525X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded by the assessee needs to be remanded back to the file of the AO / TPO so that proper analysis on FAR basis can be presented by the assessee. In case the similarity of facts are found vis- -vis the comparable companies as discussed in the ITAT orders relied by the assessee, then AO should consider the same. However, the onus will be on the assessee to show that, how these decisions of the Tribunal qua the comparable companies are applicable on the facts of the assessee s case. With this direction so far as Transfer Pricing adjustment with regard to market support system is concerned, the same is remanded back to the file of the AO for fresh adjudication Software research and development services assessee has sought to challenge the inclusion of Infosys Technologies Ltd. and Satyam Computers Services Ltd by the TPO, when these two comparable companies were assessee s own comparables which have been accepted by the TPO and also by the DRP. There is no whisper in the DRP s order qua these two comparable companies. Before us, the Ld. Counsel has merely relied upon the decision of Hon ble Delhi High Court in the case of CIT vs. Agnity India Technologies (P) Ltd. [ 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Panel I, Mumbai (DRP) vide order dated 30.08.2012. In the grounds of appeal, following grounds have been raised:- Addition to total income ₹ 99,13,649:- 1. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO') and the learned Assessing Officer (AO') under directions issued by the Dispute Resolution Panel ('DRP'), erred in making an addition to the Appellant's total income based on the provisions of Chapter X of the Income-tax Act, 1961 (the Act'). Incorrect selection of comparables by the learned TPO:- 2. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding I confirming the action of TPO in selection of the companies in case of marketing and customer support services which are not comparable despite detailed submissions filed by the Appellant. 3. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding I confirming the action of TPO in cherry picking few companies from the set of comparable companies used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, ECI Telecom India Pvt. Ltd ( ECI India ) is wholly owned subsidiary of ECI Telecom Limited, Israel. The assessee is mainly in the business of installation, commissioning and after sales service in respect of Telecom equipment supplied by its Associated Enterprises (AEs) to basic wired and wireless telecommunication operators in India and supply of telecommunication equipment accessories. The assessee also provides marketing support and customer services in relation to the Indian market and software research and development services to its AE. The international transactions reported during the financial year 2007-08 were as under:- S.No. Name of International Transaction Amount (in INR) Most Appropriate Method 1 Purchase of Expansion 694,628 Transactional Net Margin Method TNMM 2 Sale of Goods 1,818,970 TNMM 3 Purchase of lab equipment and software 52,707,039 TNMM 4 * ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to February 2006/no financial data Available It is pertinent to mention here that the TPO used only the data for the FY 2007-08. Thus the TPO excluded those companies whose data was not available for the FY 2007-08 2 Rejected companies whose Sale is greater than 500 Crores The TPO has selected those companies whose Sales is greater than ₹ 1 Crore for this Purpose 3 Companies whose manufacturing sales were greater than 75% of their total sales in the latest year for which financial data was available were rejected Not an appropriate filter. This office has applied a more appropriate filter in this regard. The companies whose service income is more than 75% of their operating revenues for the FY 2007-08 were selected as comparables. 4 Rejected companies with Possible control party connections The TPO has applied a threshold limit of 25% to the related party transactions as per the Provisions of section 92A(20(a) 5 Companies having different bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at are having peculiar economic circumstances are to be excluded. In his own search process, after using the current year data and search filters applied as above, he first listed 10 comparable companies with the arithmetic mean of 21.76%. The lists of 10 comparable companies are as under:- S. No. Name Total Income (Rs. Cr) PBIT/Cost (%) 1 Aptico Ltd. 10.67 49.35 2 Best Mulyankan Consultants Ltd 1.11 12.85 3 Choksi Laboratories Ltd. 9.45 29.2 4 I C R A Management Consulting Services Ltd 1.8.39 4.18 5 I D C (India) Ltd. 15.77 15.48 6 Indus Technical Financial Consultants Ltd 1.15 14.56 7 Rites Ltd. (Seg.) 353.13 25.77 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 008-09 1 Hellos Matherson Information Technology Limited 33.40 2 Infosys Technologies Ltd. 39.62 3 LGS Global Ltd. 26.46 4 Mindtree Ltd. 15.34 5 Persistent Systems Limited 27.70 6 Quintegra Solutions Ltd. 9.75 7 R Systems International Limited 15.30 8 Satyam Computer Services Ltd 26.19 9 Sasken Communication Technologies Limited 12.69 10 Tata Elxsi Ltd. 18.69 Arithmetic Mean 22.52 Accordingly, Transfer Pricing adjustment of ₹ 50,79,677/- was made. 6. From the stage of the DRP, so far as the segment of marketing support/ customer services is concerned, 3 comparable companies o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has analyzed the Annual report and carried out functional analysis of these companies for inclusion and exclusion of the comparables. In support, he drew our attention to TPO s observation in para 10.1 given from pages 22 to 24 of the TPO s order. He further submitted that under TNMM broad analysis has to be seen which has been done by the TPO and no discrepancy has been pointed out by the ld. Counsel. Thus he strongly relied upon the orders of the TPO as well as the DRP. 9. Regarding software services, the Ld. Counsel before us submitted that, assessee is challenging the 5 comparables, three of which has been excluded by the TPO viz:- ( i) Sagar Soft India Ltd; (ii) Birla Technologies Ltd; (iv) PSI Data Systems Ltd And two comparable companies which have been included by the TPO viz., (iv) Infosys Technologies Ltd (v) Satyam Computers Ltd. Regarding Infosys Technologies and Satyam Computers, the Ld. Counsel submitted that the same cannot be held to be comparable with the assessee for the reason that, they are very large companies having huge turnover and cannot be held to be comparable on FAR analysis. In support, he relied upon the Delhi High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting the comparable companies and secondly, in most of the cases, financial data/information for the relevant accounting period were not available. He again asked the assessee to carry out fresh search of comparable and in the second exercise, the assessee identified 8 comparables, which again has been rejected by the AO except for one comparable company, namely, IDC (India) Ltd. The TPO, accordingly, proceeded with his own search process after elaborating the various filter criteria which has been discussed by him at page 3 of TPO s order, the gist of which has already been incorporated above of our order. Based on his search, 10 comparable companies were shortlisted, out of which 3 has been rejected by the DRP. Now, in the final list there were 7 comparables companies namely:- i) Aptico Ltd. - 49.35% ii) ICRA Management Consulting Services- 4.48% iii) IDC (India) Ltd. - 15.48% iv) Indus Technical financial Consultancy Ltd. - 14.56% v) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies as discussed in the ITAT orders relied by the assessee, then AO should consider the same. However, the onus will be on the assessee to show that, how these decisions of the Tribunal qua the comparable companies are applicable on the facts of the assessee s case. With this direction so far as Transfer Pricing adjustment with regard to market support system is concerned, the same is remanded back to the file of the AO for fresh adjudication in line of the directions given above. 12. Now, coming to the software research and development services, it has been stated that the assessee has been providing software services to its AE, ECI Israel, whereby, it is developing and testing the software s used for telecommunication services manufactured by ECI Israel. R D focuses on transmission and broad band access solutions to develop next generation product line and management solutions and also to expedite the penetration of new products in the market. Under this segment, the assessee has shown NCP of 13.26%. For benchmarking the said margin, the assessee had shortlisted 24 set of comparable companies which have been partly accepted and partly rejected by the TPO. For this transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be restored back to the file of the AO / TPO to see, whether the assessee s contention in this regard are correct or not. In case, the RPT criteria falls within the ratio of less than 25%, then based on functional similarity these two comparable companies should be included in the comparability list. So far as Birla Technologies Ltd is concerned, the Ld. CIT DR has pointed out before us that, this company has income from license fees which indicates that, it is into software products and the rights of the licenses are with the Birla Technologies. Once it is into product development and there are no proper bifurcations of software license fee, then same cannot be held to be comparable. The TPO had rejected these comparable on the ground that it is providing BPO service, IT outsourcing services and, therefore, it is functionally not comparable. However, from perusal of the annual report of this company it is seen that it has shown two segments of services: - (i) hardware; and (ii) software services. So far as hardware services are concerned, it has earned revenue on account of sale of products and services, whereas, under the software services it has shown under the head service ..... X X X X Extracts X X X X X X X X Extracts X X X X
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