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TMI Blog2017 (3) TMI 1787X X X X Extracts X X X X X X X X Extracts X X X X ..... ore find no infirmity in the order of the CIT(A). Accordingly, we confirm the same. Foreign exchange fluctuation in operating margin - whether the foreign exchange fluctuation was included as operating margin in the case of comparables ? - HELD THAT:- We are of the view that similar treatment should be given in the case of tested parties and the comparables. If the foreign exchange fluctuation is included in the case of comparables, it should also be included in the case of tested parties. Therefore, we are of the view that these facts should be verified by the AO. Accordingly, we set aside the order of the CIT(A) and restore the matter to the file of the AO to verify whether foreign exchange fluctuation was included in the operating margin of the comparables. If the assessee succeeds in establishing that foreign exchange fluctuation was included in the operating margin of the comparables, the same may be included in the case of tested parties also. TP Adjustment - comparable selection - HELD THAT:- Assessee provides information technology services and IT enabled services to its Associated Enterprises thus companies functionally dissimilar with that of assessee need to be deselecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k place during the same period / financial year as held by the decision of the Pune bench in the case of' Honeywell Automation India Ltd. V. DCIT in ITA No. 4/PN/08 dated 10.02.09 and reported in 09-TIOL- 104. 7. The CIT (Appeals) erred in directing the AO to exclude Geometric Software Solutions Ltd., Tata Elxsi Ltd., and Bodhtree Consulting Ltd., from the list of comparables as being functionally different without appreciating the fact that the companies qualify all the qualitative and quantitative filters applied by the TPO. 8. The CIT (Appeals) erred in holding that Vishal Information Technology Ltd. cannot be taken as a comparable relying on the decision of the ITAT in the assessees own case for the A.Y 2006-07 without appreciating the fact that the company qualifies all the qualitative and quantitative filters applied and that the decision of the ITAT has not reached a finality as an appeal under Section 260A is pending on the said issue. 9. The CIT (Appeals) erred in directing the AO to exclude Nucleus Net Soft and GIS_Ltd. from the final set of comparables without appreciating the fact that the assesee had not objected to the adoption of Nucleus Net Soft and GIS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commercial expediency. Reliance was placed upon the judgment of the Mumbai High Court in the case of Otis Elevators Vs. CIT 195 ITR 682 (Bom) and other judgments of different High Courts. 5. Having carefully examined the orders of the lower authorities, we find force in the contention of the assessee that since the assessee has obtained the club membership for commercial expediency; the same is to be allowed as business expenditure. We therefore find no infirmity in the order of the CIT(A). Accordingly, we confirm the same. 6. Ground No. 10 relate to the inclusion of foreign exchange fluctuation in operating margin. In this regard, our attention was invited that it is not clear whether the foreign exchange fluctuation was included as operating margin in the case of comparables. Under these circumstances, we are of the view that similar treatment should be given in the case of tested parties and the comparables. If the foreign exchange fluctuation is included in the case of comparables, it should also be included in the case of tested parties. Therefore, we are of the view that these facts should be verified by the AO. Accordingly, we set aside the order of the CIT(A) and res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29,01,598 Advance received interest free 1,22,11,929 Reimbursement of expenses 7,10,35,365 11. The learned counsel for the assessee further contended that ALP adjustment was made in both the segments i.e., Software Development Services and IT enabled services. 12. We therefore are of the view that the issue of ALP adjustment in both the segments be examined independently. We therefore first of all take up the segment of Software Development Services in which the TPO has taken following 17 comparables: 1. Bodhtree Consulting Limited 2. Lanco Global Systems Ltd., 3. Exensys Software Solutions Limited 4. Sankhya Infotech Limited 5. Sasken Networks Systems Limited 6. Four Soft Limited 7. Thirdware Solutions Limited 8. R. S. Software (India) Limited 9. Geometric Software Solutions Limited 10. Tata Elxsi Limited (Seg.) 11.Visualsoft Technologies Limited (Seg.) 12. Sasken Communications Limited (Seg.) 13. Flextronics Software Systems Limited (Seg.) 14. Larsen & Toubro Infotech Limited 15. Satyam Computer Services Limited 16. Infosys Technologies Limited 17. Igate Global Solutions Limited (Seg.) Out of these 17 comparables, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: "Bodhtree Consulting Ltd.,: 10.3. This company was retained by Ld.CIT(A) but Assessee objects on the basis of functionality. However, as seen from the orders of Co-ordinate Benches 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 (supra) as well as DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013, Bodhtree Consulting Ltd., was accepted as a comparable. However, in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (Where one of us, AM is the author) has considered in detail and excluded the same for the following reasons: "1. Bodhtree Consulting Ltd. The learned counsel submitted that this company should be rejected under the following TPO's filters: • Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of ₹ 133.90 lakhs, being 34.68% of the total turnover. • Functionally different filter: The company in its response to notice u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & 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) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable 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 product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the Assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 companies from software services and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome from software licence also and AMCs. 25. 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. 26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds this company, the learned Counsel appearing on behalf of the Assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 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 because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another Assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove three companies are to be excluded. Sasken Network Systems Ltd., R S Software (India) Ltd., Visualsoft Technologies Ltd., and Sasken Communication Technologies Ltd., 10.6 Since there is no objection from Assessee and was selected by TPO, the above companies are retained. Four Soft Ltd., 10.7. The objection by Assessee is that this company is a product company. was analysed and accepted 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 (supra) para 22. It was held that the said company ahs derived income from software license and AMCs. Since functionality was already analysed, respectfully following the Co-ordinate Benches also, the same was to be excluded. i. Intoto Software India Pvt. Ltd., ITA No. 1196/Hyd/2010; ii. Cordys Software India P. Ltd., ITA No. 1451/Hyd/2010 Geometric Software Solutions Company Ltd.,: 10.8. Even though this company was accepted as comparable in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) and Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 3. Vishal Information Tech Ltd., 4. Cosmic Global Ltd., 5. Transworks Information Services Ltd., 6. Wipro BPO Solutions Ltd., 7. Ace Software Exports Ltd., 8. Nucleus Netsoft & GIS Ltd., 9. Maple E Solutions Ltd., Out of these 9 comparables, the CIT(A) has rejected Vishal Information Tech Ltd., Wipro BPO and Nucleus Netsoft & GIS Ltd. The assessee is against the inclusion of Allsec Technologies Ltd. But during the course of hearing, he could not establish sufficient reasons for its rejections. With regard to Vishal Information and Nucleus Netsoft & GIS Ltd., of which exclusion was challenged by the revenue, it was submitted that these comparables were examined by the Tribunal in the case of Pr. CIT Vs. IHG IT Services (India) Pvt. Ltd., in ITA 264/2016 and DCIT Vs. Genesis Integrating Systems India Pvt. Ltd., in IT(TP)A 869/Bang/2013. Copy of the order is placed on record. It was also contended that profile of these comparables are similar to the assessee's profile as they are also engaged in IT enabled services. On perusal of the orders of the Tribunal, we find that Vishal Information Tech Ltd., and Nuclues Netsoft & GIS Ltd., were examined by the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pgreen Solutions Pvt. Ltd. (supra) had distinguished the nature of business between the KPO and ITES as follows: "34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centres (India) (P.) Ltd.(supra). As indicated above, the expression BP0 and KPO are plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge, KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression KPO in common parlance is used to indicate an ITEs provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BP0 service providers, in as much as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly 1TEs sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the IT Rules, 1962 mandates that the comparability of controlled and uncontrol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia (P) Ltd., v. ACIT 2010-TII-30-ITAT-Mum-TP 5. Global Turbine services Inc. V. DDIT (International Taxation) [2013] 38 taxmann.com 220 (Delhi - Trib.) 6. Dy. CIT V. Panasonic AVC Networks India Co. Ltd. [2014] 63 SOT 121 (URO)/42 taxmann.com 420 (Delhi - Trib.) 7. Dy. CIT V. Petro Araldite (P) Ltd., [2013] 145 ITD 182/35 taxmann.com 590 (Mum. - Trib.) 8. Ariston Thermo India Ltd., V. Dy. CIT [2014] 147 ITD 388 [2013] 36 taxmann.com 501 (Pune - Trib.) 9. Honeywell Technology Solutions Lab (P.) Ltd. v. Dy. CJT [2014] 61 SOT 61 (RO)/[2013] 35 taxmann.com 144 (Bang. - Trib.) 10.Toyota Kirloskar Motors (P.) Ltd V. Asstt. CIT [2012] 28 taxmann.com 293 (Bang.). Therefore, we do not find any reason to interfere with the reasoning of the learned CIT(A). Hence, these grounds of appeal filed by the revenue are dismissed. 21. Ground no.5 challenges the directions of the learned CIT(A) to exclude Ms/s Nucleus & GIS Ind. Ltd from the list of comparables selected by the TPO. The CIT(A) deleted this company on the ground that the TPO had not clarified whether this company satisfies the filter of related party transactions. We find that from its annual account it had outsou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in the software services segment. 2. The Commissioner of Income-tax Appeals has erred in confirming the action of the Assessing Officer / the Transfer Pricing Officer of including the following companies while benchmarking the assesee's international transactions in the software service segment: • Sankhya Infotech Limited; and • Four Soft Limited. 3. The Commissioner of Income-tax Appeals has erred in confirming the action of the Assessing Officer / the Transfer Pricing Officer of including 'Allsec Technologies Limited' as a comparable company while benchmarking the assesee's international transactions in the Information Technology Enabled Services ("lTeS") segment. 24. During the course of hearing, the assessee has opted not to press ground Nos. 1 and 3. Therefore, are dismissed being not pressed. As far as ground No. 2 is concerned, we have already dealt with these 2 comparables while adjudicating the issue in the revenue's appeal on the basis of the chart filed by the assessee and we have directed that only Sankhya Infotech and Four Soft Ltd., be excluded from the final list of comparables. Accordingly, the appeal of th e reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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