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TMI Blog2019 (11) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... we are of the view that the filter of 25% applied by the TPO is apt. - ITA No. 5801/DEL/2011 - - - Dated:- 30-10-2019 - Shri N.K. Billaiya, Accountant Member, And Shri Kuldip Singh, Judicial Member For the Assessee : Shri Ravi Sharma, Adv, Ms. Shruti Khimta, AR For the Department : Shri Sanjay I Bara, CIT- DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, This appeal by the assessee is directed towards the order dated 31.1.2011 framed u/s 143(3) r.w.s 144C(5) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act']. 2. The solitary grievance of the assessee reads as under: The Ld. Dispute Resolution Panel ( DRP ) and the Ld AO (following direction of the DRP) erred the on facts and in law in confirming the addition of ₹ 31,345,467 to the income of the appellant as proposed by the Ld TPO by holding that the international transactions undertaken by the appellant do not satisfy the arm s length principle envisaged under the Income-tax Act 1961 Act . 3. Briefly stated the facts of the case are that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cel Transmatic Limited (Se; 20.90% 2 Avani Cimcon Technologies Limited 50.29% 3 Celestial Labs Limited 58.35% 4 Datamatics Limited 1.38% 5 E-Zest Solutions Limited 35-63% 6 Flextronics Software System [Seg] 25.31% 7 Geometric Limited (Seg.) 10.71% 8 Helios Matheson Information Techlogy Limited 35-63% 9 IGate Global Solutions Limited 7-49% 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment 0.84% Adj. Airthmetic mean OP/TC 24.16% 8. The assessee challenged the inclusion of 17 comparables. The ld. counsel for the assessee further challenged the two comparables for which information was received from the companies u/s 133(6) of the Act and no opportunity was given to the assessee to put forth its arguments against the exclusion of these two comparables. 9. Before proceeding any further, let us first understand the following relevant filters adopted by the TPO: i) Single year data i.e. F.Y. 2006-07 ii) Though the assessee has taken companies with ratio of other operating income to sales greater than 50%, the TPO selected 75% limit. Accordingly, all the companies whose income from software development services constituted at least 75% of the total operating income were selected. iii) Though the assessee has taken companies with ratio of R D expenses to sales greater than 3%, the TPO was of the opinion that there are no studies to show that the R D a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In our considered opinion, the Act does not provide directions as to what percentage RPT transaction have material effect on the overall margins. In the definition of the Associated Enterprises in section 92A(2)(a), it is provided that one enterprise holding 26% shares in other enterprise can be considered as an AE. Similarly, u/s 40A(2b) of the Act, it is provided that persons having substantial interest is a person carrying not less than 20% of voting power in that company. Keeping these provisions in mind, we are of the view that the filter of 25% applied by the TPO is apt. 15. Another argument placed by the ld. counsel for the assessee is that this company owns software products and is also engaged in the sale of software products. But, as mentioned elsewhere, segmental reporting is in detail in the Annual Report of this company. We do not find any reason for exclusion of this company. This company will remain in the final set of comparables. II. AVANI CIMCON TECHNOLOGIES LIMITED 16. The Annual Report of this company is placed at pages 80 to 96 of the paper book. The total income is shown at ₹ 3,64,27,306/- and whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We, accordingly, do not find any merit in the inclusion of such a company. Accordingly, this company is directed to be excluded from the final set of comparables. IV. E-ZEST SOLUTIONS LIMITED 20. The Annual Report of this company is placed at pages 125 - 146 of the paper book. This company undertakes diversified activity providing services such as custom software development, CRM, ERP, open source ERP, knowledge management consulting healthcare manufacturing, manufacturing solutions, etc. The total income as per the Profit and Loss Account is ₹ 6,30,22,252/- which includes export turnover and domestic turnover. But no segmental information is available. The TPO has also mentioned that from the Annual Report available in the public domain, functionality is not clear and also the RPT information was not available. 21. Though the TPO refers to the reply received by him pursuant to the notice issued u/s 133(6) of the Act, but no details have been furnished by the TPO in respect of the reply demonstrating that this company passes all the filters applied by him. As the Annual report exhibited in the paper book does not contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VIII. ISHIR INFOTECH LIMITED 26. The Annual Report of this company is placed at pages 616 to 634 of the paper book. Its Profit and Loss account shows professional receipts from export and domestic services at ₹ 7,42,09,887/- whereas its salary and staff welfare expenses are at ₹ 29,35,065/- which makes its employees cost ratio 3.95% which is well below than the employee cost filter of 25% adopted by the TPO. For this very reason, this company fails to be a good comparable and is directed to be excluded from the final set of comparables. IX. KALS INFORMATION SYSTEMS LIMITED 27. The Annual Report of this company is placed at pages 635 to 659 of the paper book. The income from sales services and training is at ₹ 2,09,05,322/- which includes income from software development export sales of ₹ 2,00,09,937/-. Though the ld. counsel for the assessee has contended that this company is functionally dissimilar and segmental information is not available, but from the schedule forming part of the balance sheet, income from software development export sales is separately mentioned alongwith other segments, namel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are incomparable. We, therefore, do not find this company as good comparable and direct for exclusion of it from the final set of comparables. Accordingly, we do not find this company as a good comparable and direct the TPO to exclude this company from the final set of comparables. XII. PERSISTENT SYSTEMS PRIVATE LIMITED 32. The Annual Report of this company is placed at pages 762 to 895 of the paper book. In its Profit and Loss account, sale of software services and products is at ₹ 31,231/- and in Schedule 11, bifurcation is given for sale of software services and products - export and domestic. Though segmental information is provided in the Annual Report, from which sale of software services can be separately known from the sale of products, but the information received by the TPO u/s 133(6) of the Act, the company has informed that its software products sales constituted 0.73% of the Revenue which means that more than 99% of the Revenue is from software services. 33. The ld. counsel for the assessee vehemently stated that this company is functionally dissimilar as it is engaged in outsourced software product developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit, revenue from subscription, etc. The Profit and Loss Account of this company shows sales at ₹ 38,21,39,652/- but there is no segmental account though the TPO has mentioned that the information gathered u/s 133(6) of the Act shows that this company s software development segment qualifies all the filters but has not given any financial date to support his claim due to non availability of data for comparison. We direct the TPO to exclude this company from the final set of comparables. XVII. WIPRO LIMITED 38. The Annual Report of this company is placed at pages 1320 to 1535 of the paper book. This company is engaged in diversified activities and is a giant global IT services and product provider. This company has huge brand value and owns IP. The turnover of this company is ₹ 9,654 crores as against ₹ 19.99 crores of the appellant company. Because of its global status, high brand value, ownership of IP and engaged in diversified activities, in our considered opinion, this company should not have been selected in the final set of comparables. We, therefore, direct the TPO to exclude this company from the final set of comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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