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TMI Blog2018 (7) TMI 2087X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-12. 02. The grounds raised by the assessee are as under : 03. The grounds raised by the Revenue are as under : The assessee before us urged only ground nos.8, 9, 10 and 14. The remaining grounds have not been pressed by the AR of the assessee. 04. Brief facts are that the assessee is engaged in the provision of software development services in the designing of Cypress range of products. The Assessee provides services to its parent company in the designing and development of integrated circuits, software and computer aided design tools. During the previous year relevant to the Assessment Year (`AY' for short) 201112, the Assessee provided SWD services to its AEs at a price of ₹ 1,49,91,75,237/- towards which the TPO made an adjustment of ₹ 20,08,18,017/-. Initially, a draft assessment order dated 27.03.2015 came to be passed by the Assessing Officer (`AO' for short) in which, inter alia, the aforesaid TP adjustment was proposed to be incorporated. The net margin on cost earned by the assessee is as under : Operating Income ₹ 149,91,75,23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersistent Systems Solutions Ltd., and had also brought in another eleven comparables. Thus the final list of comparables, as per the TPO were as under : SI. No. Name of the Company 1 Acropetal Technologies Ltd. (seg) 2 e-Zest Solutions Ltd. 3 E-Infochips Ltd. 4 Evoke Technologies Pvt. Ltd. 5 ICRA Techno Analytics Ltd. 6 Infosys Ltd. 7 Larsen Toubro Infotech Ltd. 8 Mindtree Ltd. (seg) 9 Persistent Systems Solutions Ltd. 10 Persistent Systems Ltd. 11 R S Software (India) Ltd. 12 Sasken Communication Technologies Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant extract from its annual report is produced at pages 102-105 of the paper book. Even otherwise, the Assessee submits that this company is functionally dissimilar to it as it is engaged in rendering IT services and in the development of software products without there being separate segmental information disclosed in its Annual Report for such activities. The Assessee places reliance on the decisions of this Hon'ble Tribunal in Applied Materials India Pvt. Ltd. v. ACIT [TS-815-1TAT-2016(Bang)-TP at paras 9.2.1 to 9.2.4 on pages 18-22] and Commscope Networks (1) Pvt. Ltd. v. ITO [TS-161-ITAT-2017(Bang)-TP at para 9 on pages 16-17] where, in the cases of assessees similar to the assessee herein, the said company was directed to be excluded for the same assessment year. Without prejudice and in any event, as per its Annual Report, the ratio of the RPTs of Persistent Systems Ltd. to its total sales for FY 2010-11 amounts to 15.42% and, therefore, it ought to stand rejected for that reason. Sasken Communication Technologies Ltd. - The Assessee seeks rejection of Sasken Communication Technologies Ltd. (`Sasken' for short) for the reason that it is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paras 9.2.1 to 9.2.4 on pages 18-22] and Commscope Networks (I) Pvt. Ltd. v. ITO [TS-161-ITAT2017(Bang)-TP at para 9 on pages 16-17] where, in the cases of assessees similar to the assessee herein, the said company was directed to be excluded for the same assessment year. 06. On the other hand the Ld. DR relied upon the orders passed by the lower authorities, in support of his plea that these three companies should not be excluded from the list of comparables. 07. We have heard the rival contentions and perused the material on record. The assessee relies upon the decision of this Tribunal in the matter of Applied Materials India P. Ltd v. ACIT (73 taxmann.com 160), wherein the Tribunal after thoroughly examining the functional profile of the company had deleted these three comparables, namely, Persistent Systems Ltd, Persistent Systems and Solutions Ltd and Sasken Communication Technologies Ltd, to the following effect : (4) Persistent Systems Ltd. 24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. Persistent Systems and Solutions Ltd.: The Assessee submits that this company is functionally dissimilar to it as it is engaged in diversified activities, being the rendering of software services and licensing and royalty of software products, without there being separate segmental details for the aforesaid diverse activities. During the financial year 2010-11, this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at ₹ 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect to R S Software (India) Ltd, we do not find any reason to exclude this comparable when this comparable is sought to be included by both the assessee as well as the Revenue as a good comparable. Therefore considering the profile of R S Software (India) Ltd, we direct the inclusion of this comparable. Mindtree Ltd and Evoke Technologies 11. Now we are left with Mindtree Ltd and Evoke Technologies Ltd. The assessee has submitted that these comparables were considered by the coordinate bench in the matter of Applied Materials Applied Materials India P. Ltd (supra), (para 21 to 21.2) as under : 21. The revenue is also seeking inclusion of the following companies which were rejected by the DRP. i) Evoke Technology P. Ltd ii) Mindtree Ltd (seg) iii) R S Software India P Ltd 21.1 At the time of hearing, the learned Authorised Representative of the assessee has submitted that the assessee has no objections if these three companies are restored to the set of comparables as the assessee did not raise any objection before the DRP but the DRP rejected this company suo moto. 21.2 In view of the fact that both the revenue as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the assessee. In view of the above, working capital adjustment on actual basis is required to be given without any cap. An identical issue was also raised in the matter of VMware Software India P. Ltd (supra), wherein the Tribunal held as under at para 34 and 35 of the order : 34. The next issue raised by the assessee is regarding restriction of working capital adjustment benefit to 1.71%. 35. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The TPO while computing the working capital adjustment has restricted the benefit to 1.71% instead considering the actual figure in respect of each and every comparable companies. We find that there is no provision under FAR analysis to restrict the working capital adjustment benefit arbitrarily. An identical issue has been considered by the co-ordinate bench of this Tribunal in the case of ARM Embedded Technologies Pvt. Ltd v. DCIT (supra) in paras 24 25 as under : Accordingly, we direct the AO/ TPO to recompute the working capital adjustment by taking the actual data without putting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware development is ₹ 81.40 crores out of total revenue of ₹ 141 crores. Therefore this company fails this filter. 16.3 In a rejoinder the ld. DR has submitted that the TPO has considered only Information Technology transactions segment and therefore it satisfies software development services income filter as well as employee cost filter. 16.4 We have considered the rival submissions as well as the relevant material on record. As per the segmental reporting at page 53 of the Annual Report the income from Information Technology Services is ₹ 81.40 crores out of the total income of ₹ 141 crores. Therefore the revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy the filter of information technology revenue applied by the TPO itself. Accordingly, we do not find any reason to interfere with the order of the DRP for this issue. L T Infotech Ltd. 19. We have heard the learned D.R. as well as learned D.R. and considered the relevant material on record. The DRP rejected this company by recording the facts at page 15 as under : On perusal of sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems Solutions Ltd., 5) Persistent Systems Ltd., 6) Sasken Communication Technologies Ltd. and 7) Tata Elxsi Ltd. are also covered in favour of the assessee by the same tribunal order rendered in the case of Applied materials India Pvt. Ltd. vs. ACIT (Supra). Respectfully following the same, we uphold the exclusion of these Seven comparables also. Exclusion of E Infochips Ltd. is covered in favour of the assessee by the tribunal order rendered in the case of Saxo India Pvt. Ltd. vs. ACIT in ITA No. 6148/De1/2015 dated 05.02.2016 Para 10.1 10.2 available at pages 221 to 223. Respectfully following the same, we uphold its exclusion. In this manner, we uphold the exchision of six comparables excluded by DRP out of 9 comparables excluded by DRP and exclude 4 comparables retained by DRP and we have already held that out of 9 comparables excluded by DRP, 3 have to come back being 1) Evoke Technologies Pvt. Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. Now, we decide about LGS Global Ltd. As per the tribunal order rendered in the case of Applied materials India Pvt. Ltd vs. ACIT (Supra), this is a good comparable and therefore, we direct the A.O. and TPO to include this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of ITAT in the case of Saxo India (P.) Ltd. (supra) in paras 10.1 to 10.2 and 15.1 to 15.2 as under: (i) E-Infochips Limited: 10.1 The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at ₹ 3.92 crore, which has been considered by the Transfer Pricing Officer himself as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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