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TMI Blog2015 (12) TMI 1824X X X X Extracts X X X X X X X X Extracts X X X X ..... sign, development and maintenance services and marketing support services to its associated enterprises (AEs) as a captive service provider need to be deselected from final list. Companies having turnover exceeding 200 crores is to be excluded from the final list of comparables selected by the TPO in the light of decision of the coordinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd [ 2015 (4) TMI 373 - ITAT BANGALORE] Companies with related party transactions exceeding 15% be excluded from the list of comparables chosen by the TPO. Inclusion of reimbursement of expenses in the operating cost as well as operating revenue of the assessee company - HELD THAT:- We find that the assessee company has received reimbursement of these expenses as cost from its AE and consequently the amount received/receivable is deemed to be at arm s length price. Hence this ground of appeal is allowed. Working capital adjustment - HELD THAT:- Advances received from AEs should be considered as a part of trade payables in the computation of working capital adjustment. Hence, the TPO/AO is directed to consider advances from ARM Ltd. UK and ARM Inc., USA in the computation of wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of ₹ 1,08,39,448 on account of arm's length price (ALP) of international transactions entered into by the assessee with its Associated Enterprises (AEs) in respect of software design, development and maintenance services, pursuant to the order dated 26.10.2009 passed by the Transfer Pricing Officer (TPO). The AO also made an addition of ₹ 16,05,774 on account of re-computation of deduction claimed u/s. 10A of the Act. Aggrieved by the draft assessment order, the assessee filed its objections before the Dispute Resolution Panel (DRP). The DRP upheld the order passed by the AO. Consequently, the AO passed the final order dated 26.07.2010 raising a demand for the balance tax payable of ₹ 1,12,22,415. 6. Aggrieved the assessee is in appeal before the Tribunal. 7. The details of international transactions entered into by the assessee are as follows:- Particulars Amount in R.s Outcome of TP order Provision of software development services 247,026,837 Adjustment of Rs. ,1,98,39,448 Provision of marketing support services 17,112,509 Accepted to be at arm's length Reimbursement of expenses paid 17,791,408 Accepted to be at arm's length R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. The learned DR strongly objected to admission of above additional grounds and submitted that in case these were admitted, the comparability of the concerned companies has to be referred back to the AO/TPO for verification afresh. 16. After considering the averments of the counsels with regard to admission of additional grounds, we find force in the contention of the learned AR that by virtue of Special Bench decision in the case of M/s Quark Systems Pvt. Ltd (Supra), assessee can raise additional grounds seeking exclusion of comparables selected by it or not objected by it before the lower authorities. However, the Hon'ble Punjab & Haryana High Court in (2011) 62 DTR 0182 had upheld the Special Bench decision in the case of M/s Quark Systems Pvt. Ltd. ( Supra) specifically noting that the Special Bench had remitted the issue of comparability of such companies to the AO/TPO for verification afresh. Hence, we are admitting the additional grounds. However, the comparability of the companies assailed in such additional grounds will be dealt by us, considering the judgment of the Hon'ble Punjab & Haryana High Court judgment in the case of CIT Vs M/s Quark Systems India (P) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 12. The facts and circumstances under which the aforesaid companies were considered as comparable are identical in the case of the Assessee as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Trilogy E-Business Software India Pvt.Ltd.(supra), we direct that KALS Information Systems Limited and Accel Transmatics Ltd., be excluded from the list of 20 comparable arrived at by the TPO. ……… 15. As far as the comparable chosen by TPO viz., Infosys Limited is concerned, it has been held by the co-ordinate bench of ITAT Bangalore in the case of Logica Pvt.Ltd. Vs. ACIT ITA No.1129/Bang/2011 (AY 07-08) that this company is a full fledge risk assuming entrepreneur, holds technology and marketing intangible and is functionally different providing endto- end solutions encompassing technical consulting, design, development, re-engineering, maintenance, systems integration and package evalua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility analysis for determining arms length price in the case of the assessee." ……… 7.4 Infosys Technologies Ltd.: The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sale revenue, stage of business cycle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at ₹ 69,522 crores, which comprises of brand value itself at ₹ 22,915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India's No.2 software service exporter and Third in the World as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than ₹ 13145 crores and expenditure on advertisement/sales promotion and expenditure on R&D is at ₹ 69 crores and ₹ 167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable." 14. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO." 18. Respectfully following the coordinate Bench decision of this Tribunal in the case of Cypress Semiconductor India P. Ltd. (supra), we direct that the 4 companies viz., Infosys Ltd., KALS Infosystems Ltd., Tata Elxsi (Seg.) and Accel Transmatics Ltd. being functionally dissimilar be excluded from the final list of comparables selected by the TPO. 19. With respect to Lucid Software Ltd., since the assessee has raised additional ground before the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- "Size criteria in terms of Sales, Assets or Number of Employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability." 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of ₹ 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than ₹ 200 crores ought to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software India Pvt.Ltd. (supra), we hold that the following companies should be excluded from the list of comparable companies. (1) Flextronics Software Systems Ltd. 595.12 crores (2) iGate Global Solutions Ltd. 527.91 crores (3) Mindtree Ltd. 448.79 crores (4) Sasken Communication Technologies Ltd. (Seg.) 240.03 crores (5) Persistent Systems Limited 209.18 crores. 19. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable." 21. We direct the AO to decide whether the five companies viz., iGate Global Solutions Ltd. (Seg.), Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communication Ltd. (Seg.) and Flextronics Software Systems Ltd., having turnover exceeding ₹ 200 crores is to be excluded from the final list of comparables selected by the TPO in the light of decision of the coordinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd. (ITA No.1167/Bang/2010 dated 27.03.2015). 22. The ld. counsel for the assessee next submitted that 3 comparables at Sl.No.1, 2 & 18 of the final comparables of the TPO having more than 15% Related Party Transactions may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s:- 26. The assessee submitted that +/- 5% of the arithmetical mean for software development services would be as follows:- Particulars Margin Net Margin of the Appellant 11.52% Arithmetical mean of the margin of the comparables 10.56% +5% of the Appellant's Margin 16.08% -5% of the Appellant's Margin 5.03% Accordingly, we set aside the issue of determination of NCP margin to the file of the Assessing Officer. 28. The next issue that arises for consideration is with respect to inclusion of reimbursement of expenses in the operating cost as well as operating revenue of the assessee company. The TPO has included the reimbursement of expenses received amounting to ₹ 4,371,178/- as part of the cost base for applying the adjusted operating cost plus markup. In this regard, the assessee submitted that the reimbursement of expenses received by the Company was incurred by it on behalf of its AEs, following the policy of reimbursing such expenses on cost to cost basis and no services have been rendered by the assessee in relation to the reimbursements, therefore, reimbursements purely relate to third party expenses incurred on behalf of the AEs. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently adjusts these advances against the invoices raised. Given that the assessee is a captive service provider, it may choose to invest such advances towards either purchase of assets or for incurring expenses, but ultimately such an advance is utilized towards performing contractual services. Therefore, it was the submission of the ld. counsel for the assessee that the advances received from its AEs should be considered as a part of trade payables in computation of working capital adjustment. The workings for average trade payables furnished by the assessee are as follows:- 33. Accordingly, it was submitted by the assessee that the working capital adjusted arm's length mark-up for the 20 comparables selected by the TPO would be 15.55% (after working capital adjustment of 5.13%) for software development services provided by the assessee. Based on the remaining 7 out of the 20 comparables selected by the TPO the assessee's margin of 11.52% is within the +/- 5% of the working capital adjusted mean of 10.56% as computed by the TPO. If the working capital adjustment is computed by including "Advances received from AEs" as part of trade payables, the working capital adjusted mark-u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tile STPI unit. 39. The assessment was completed computing an income of ₹ 6,36,40,660. In dong so, the Assessing Officer made an addition of ₹ 5,78,84,564 on account of ALP of international transactions entered into by the assessee with its AEs in respect of software design, development and maintenance services, pursuant to the order dated 30.09.2010 passed by the TPO. The AO also made an addition of ₹ 17,08,902 on account of re-computation of deduction claimed u/s. 10A of the Act. Aggrieved by the draft assessment order, the assessee filed its objections before the Dispute Resolution Panel (DRP). The DRP upheld the order passed by the AO. Consequently, the AO passed the final order dated 20.09.2011 raising a demand of ₹ 3,07,35,220. 40. Aggrieved the assessee is in appeal before the Tribunal. 41. The details of international transactions entered into by the assessee are as follows:- 42. Net margin on cost earned by assessee is as under:- 43. Out of the 18 comparables selected by the assessee, the TPO accepted two companies i.e, SIP Technologies & Exports Ltd. and Mindtree Consulting Ltd. and rejected the remaining 16 comparables on the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO/TPO for verification afresh. 49. After considering the averments of the counsels with regard to admission of additional grounds, we find force in the contention of the learned AR that by virtue of Special Bench decision in the case of M/s Quark Systems Pvt. Ltd (Supra), assessee can raise additional grounds seeking exclusion of comparables selected by it or not objected by it before the lower authorities. However, the Hon'ble Punjab & Haryana High Court in (2011) 62 DTR 0182 had upheld the Special Bench decision in the case of M/s Quark Systems Pvt. Ltd. ( Supra) specifically noting that the Special Bench had remitted the issue of comparability of such companies to the AO/TPO for verification afresh. Hence, we are admitting the additional grounds. However, the comparability of the companies assailed in such additional grounds will be dealt by us, considering the judgment of the Hon'ble Punjab & Haryana High Court judgment in the case of CIT Vs M/s Quark Systems India (P) Ltd., (2011) 62 DTR 0182. Hence the additional grounds are set aside to the file of the Assessing Officer. 50. The ld. counsel for the assessee firstly submitted that the Megasoft Ltd. is to be accepted as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its software service segment. The product segment has employee cost of 27.65% whereas the software service segment has employee cost of 50%. Similarly, the profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both the segments are substantially different and therefore comparison at entity level is without basis and would vitiate the comparability (submissions on page 381 to 383 of the PB-I). It was further submitted that Megasoft Limited has provided segmental break-up between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... natively it was submitted that the profit margin of 60.23% was abnormally high and deserves to be rejected on this ground, as not within the parameters of comparability. In this regard, reference was made to the decision of Special Bench of ITAT Chandigarh in the case of Quark Systems Pvt. Ltd. (supra) besides several other tribunal decisions laying down identical proposition. Further it was submitted that Visual Soft Technologies Ltd. merged with Megasoft Ltd. w.e.f. 01.10.2006. Therefore the book results in the year in which the merger has taken place cannot be taken as a comparable. In this regard, reliance was placed on the decision of the Mumbai Bench of the ITAT in the case of Emersons & Process Management India Pvt. Ltd. v. Addl. CIT 13 Taxmann.com 149. 31. The learned DR relied on the order of the TPO and the DRP on this aspect. 32. We have considered the rival submissions. First we will consider the submission of the Assessee that companies with abnormal margins should not be regarded as comparable. In the case of Quark Systems Pvt. Ltd. (supra), the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows: "Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As far as the provisions of the Act are concerned, they lay down that the comparable companies should be functionally comparable to the tested party. There are no specific standards of comparability on the basis of abnormal profits or loss. Rule 10B(2) provides that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius- BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Solutions Ltd. (v) Helios & Matheson Information Technology Ltd. (vi) KALS Information Systems Ltd. (vii) Lucid Software Ltd. (viii) Quintegra Solutions Ltd. (ix) Thirdware Solutions Ltd. (Seg.) 53. Out of the above 9 comparables, KALS Informations Systems Ltd. and Lucid Software are functionally dissimilar to the assessee company and hence they are to be excluded as comparables in light of the Tribunal's decision in the case of Cypress Semiconductors India P. Ltd. (supra), which has been extracted at para 17 in the order for AY 2006-07. 54. As regards the 3 companies viz., Accel Transmatics Ltd., Avani Cincom Technologies Ltd. and Celestial Labs, this Tribunal in the case of NXP Semiconductors India P. Ltd. (supra) has held as follows:- "18. As far as comparable companies listed at Sl.No.1,2,3 and 12 of the final list of comparable companies chosen by the TPO viz., M/S.Accel Transmatic Limited (seg.), Avani Cincom Technologies Ltd., Celestial labs Limited and KALS Infosystems Ltd., are concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .R. however drew our attention to page- 389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "26. As far as comparable companies at Sl.No.5, 18, 19 and 25 of the final list of comparable companies chosen by the TPO are concerned, viz., M/S. E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Limited and Third ware Solutions Ltd., this Tribunal in the case of 3DPLM Software Solutions Ltd. I.T (T.P) A. No.1303/Bang/2012 (Assessment Year : 2008-09) order dated 28.11.2013 was pleased to hold that the aforesaid companies are not comparable with a company engaged in Software Development Services such as the Assessee. The following were the relevant observations of the Tribunal: "14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. /TPO is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : " Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 27. ……… 28. As far as comparable chosen by the TPO at Sl.No.8 of the final list of comparable viz., M/S. Helios & Matheson Information Technology Ltd., we find that the said company has been he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (Seg) from the final list of comparable companies for the purpose of determining ALP, following the decision of the Tribunal in the case of NXP Semiconductors India Pvt. Ltd., (supra). 59. The ld. counsel for the assessee further submitted that Geometric Ltd. (Seg). selected by the TPO as a comparable has to be excluded as its RPT exceeds 15% in view of the decision of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 and Logical Pvt. Ltd. (supra). 60. This Tribunal in the case of NXP Semiconductors India Pvt. Ltd., (supra) has held that the RPT of Geometric Ltd. exceeds 15% and such company should not be taken as a comparable. The relevant observations of the Tribunal have been extracted at para 22 of this order while dealing with A.Y. 2006-07. Following the aforesaid decision, Geometric Ltd. is directed to be excluded from the list of comparables for A.Y. 2007-08. 61. Similarly, in the A.Y. 2006-07 in the assessee's own case, following the decision of the coordinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd. (supra), we have already held at paras 20 & 21 hereinabove that the companies viz., iGate Global Solution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately ₹ 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions:- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly." 63. Respectfully following the decision of the Tribunal in the case of NXP Semiconductors India Pvt. Ltd. (supra) and M/s. Curam Software International Pvt. Ltd. (supra), we direct the AO/TPO to exclude these companies viz., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decision of the co-ordinate bench, we hold that these two companies are also to be excluded." 66. Respectfully following the decision of the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these expenses as cost from its AE and consequently the amount received/receivable is deemed to be at arm's length price. Hence this ground of appeal is allowed. 73. With respect to the next issue of working capital adjustment, the ld. counsel submitted that though the results of +/- 5% of the arithmetical mean for software development services is achieved by applying working capital adjustment as computed by the TPO, the AO/TPO erred in not considering the advances received from the customers as part of trade payables in determination of working capital adjustment and thereby erred in not providing an appropriate adjustment towards working capital. It was submitted that in the TP order, the TPO has determined the arm's length markup as 23.70% (after working capital adjustment of 1.44%) for software development services provided by the assessee. However, the TPO has not considered advances from ARM Ltd. UK and ARM Inc., USA in computation of the working capital adjustment. 74. It was further submitted that the TPO has considered the assessee's trade payables as on March 31, 2006 at ₹ 2,88,79,340 and as on April 1, 2006 at ₹ 50,29,849. The TPO has thereby not consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction by reducing the said amounts from export turnover but not from total turnover and thereby disallowed the 10A deduction to the extent of ₹ 17,08,902. The assessee's submission is that no part of the above expenditure was attributable to the delivery of software outside India and in the alternative, if the same is reduced from export turnover it should also be reduced from total turnover. On the alternative submission, reliance was placed upon the decision of the Hon'ble High Court of Karnataka in CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Kar). In this judgment, it has been held that whatever is excluded from the export turnover, has also to be excluded from the total turnover. Accordingly, we direct the AO to re-compute the deduction u/s. 10A in respect of travel expenses and telecommunication charges by reducing the same from total turnover also. 78. The last issue raised by the assessee is regarding non-grant of refund and corresponding interest u/s. 234D. The assessee submitted that according to the AO, refund of ₹ 7,04,700 has been issued to the assessee, but the assessee has not received the refund. Consequently, the AO has erred in charged u/s. 234D of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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