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TMI Blog2020 (5) TMI 380X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide directly as to what percentage of related party transactions can have material effect on the overall margins. Guidance can be taken from definition of the Associated Enterprise from Section 92A(2)(e) where in it is prescribed that one enterprise holding 26% shares in the other enterprise can be considered as an associate enterprise. Similarly in the provisions of Section 40A(2)( b) the persons having substantial interest is described as a person carrying not less than 20% of voting power in that company. 20 % or 26% interest is considered as substantial interest. As the provisions of Section 92A(2 )( a) are from the transfer pricing chapter itself, a limit of 25 % is applied as the threshold limit for the related party transactions. If the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. We order that the decision of the ld. CIT (A) on the issue of RPT cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atio of 2.2 this will not be a correct comparable. Accurate Data Convertor is a development services company and Wipro Ltd. has invested in R D activities for development of IP, hence not meeting the criteria of FAR. X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices by ₹ 71 ,09,586 . [corresponding to ground 2 of original grounds of appeal] 3. The learned CIT-(Appeals) has erred in upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis performed by the learned TPO in the TP Order; [corresponding to ground 3 (a) of original grounds of appeal] 4. That the learned CIT( A) has erred in upholding the learned TPO's action of carrying out his own comparability analysis and modifying some of the filters applied by the Appellant (i.e. related party transaction [' RPT'] filter >0% applied by the learned CIT(A)), without providing an opportunity of being heard; [corresponding to ground 3( b) of original grounds of appeal] 5. That the learned CIT(A) erred in applying RPT>0 % filter in excluding companies, whereas RPT> 15 % filter should have been applied and accordingly should have excluded Accel Transmatic Ltd., Geometric Ltd., R Systems International Ltd and Ishir Infotech Ltd in the software development segment of the Appellant and Apollo Health Street Limited, Caliber Point Business Solutions Ltd., HCL Comnet Systems and Services Ltd. and Informed Technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue from software products and no segmentation is available; [corresponding to ground 3( c) of original grounds of appeal] 11. That the learned AO/TPO erred in not appreciating that Lucid Software Ltd is functionally not comparable to the software development segment of the Appellant, as it is a software product company which has incurred substantial product development expenditure; [corresponding to ground 3(c) of original grounds of appeal] 12. That the learned CIT (A) erred in excluding Mediasoft Solutions Ltd. on account of functional dissimilarity and low margin, whereas this company is functionally comparable to the software development segment of the Appellant; [corresponding to ground 6 (additional grounds)] 13. That, without prejudice, the learned CIT ( A) while excluding Persistent Systems Ltd. on the ground of RPT>0 %, has failed to appreciate that this company should have been excluded on the basis of it being functionally dissimilar to the software development services of the Appellant, as it is engaged in provision of software services and software product development with no segmental information available [ corresponding to ground 5 of additional grounds)] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Eclerx Services Ltd on the ground of RPT>0 %, has failed to appreciate that this company is functionally dissimilar to the IT enabled segment of the Appellant, as it is engaged in providing specialized services like Data Analytics, Operations Management and Audits & Reconciliation services which are in the nature of nature of Knowledge Process Outsourcing (' KPO') service and cannot be compared to a support services company like Appellant; [corresponding to ground 3 (c) of original grounds of appeal] 20. That, without prejudice, the learned CIT( A) while excluding HCL Comnet Systems and Services Ltd. (seg) on the ground of RPT>0 %, has failed to appreciate that this company is functionally dissimilar to the IT enabled segment of the Appellant, as it provides connectivity services, security services and IT infrastructure management services, has intangibles, has RPT >15 % of sales and has a different accounting year; [corresponding to ground 3 (c) of original grounds of appeal] 21. That, without prejudice, the learned CIT( A) while excluding Informed Technologies Ltd on the ground of RPT>0 %, has failed to appreciate that this company is functionally dissimilar to the IT e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unreliable; [corresponding to ground 7 (additional grounds)] 27. That the learned CIT ( A) erred in upholding the action of the learned TPO in including Vishal Information Technologies Ltd. as a functionally comparable company to the IT enabled services segment of the Appellant, whereas this company is functionally dissimilar as it has a different business model wherein it provides agency services by outsourcing services to third party vendors and acting as an intermediary between the final customer and the vendor and thereby having low employee cost of 2 .3 % of its revenue; [corresponding to ground 7 (additional grounds)] 28. That, without prejudice, the learned CIT ( A) while excluding Wipro Ltd. only on the ground of RPT>0 %, has failed to appreciate that this company is functionally dissimilar to the IT enabled services segment of the Appellant, as it is engaged in providing activities of various fields like technology innovation, process innovation & delivery innovation, has brand value and is engaged in significant Research and development activities, unlike the Appellant; [ corresponding to ground 3 (c) of original grounds of appeal] 29. That, without prejudice, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e control transactions. The ld. CIT (A) held that even a one comparable without related party transaction is arrived on the comparability analysis, there is no rationale to retain the comparables which have related party transactions. The ld. CIT (A) is of the opinion that only if it is not possible to find out any comparable without the related party transaction, the TPO has to apply a suitable filter to identify such comparables, margins on which are not influenced by the related party transaction to make a purposive interpretation uncontrolled transaction. In the instant case, the ld. CIT ( A) held that there is no need to include any comparable which has a related party transaction as there are a number of comparables available for the study which do not have any related party transactions. Holding this, he excluded Accel Transmatic Ltd., Geometric Ltd., R Systems International Ltd and Ishir Infotech Ltd in the software development segment and Apollo Health Street Limited, Caliber Point Business Solutions Ltd., HCL Comnet Systems and Services Ltd. and Informed Technologies Ltd in the ITES segment. 10. We have gone through the arguments and facts on record. In the case of Arib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. If the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. Hence, keeping in view the entirety of the facts, we order that the decision of the ld. CIT (A) on the issue of RPT cannot be upheld. Accordingly, we direct the exclusion of concerns Accel Transmatic Ltd., Geometric Ltd., R.Systems International Ltd. and Ishir Infotech Ltd. in the software development segment of the appellant and Apollo Health Street Limited, Caliber Point Business Solutions Ltd., HCL Comnet Systems and Services Ltd. and Informed Technologies Ltd. in the ITES segment. 11. The comparable Avani Cimcon Technologies Ltd., e-Zest Solutions Ltd., Flextronics Software Systems Ltd., Ishir Infotech Ltd., Mediasoft Solutions Ltd., Thirdware Solutions Ltd. cannot be functionally similar, hence cannot be taken as comparable. The details are as under: S. No. Name of the comparable Reasons Remarks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the low margins. The case of the assessee is that the same merits to be included. However, we find no merit in the same. 15. Now coming to the ITES segment wherein the assessee has chosen 15 comparables to benchmark its transaction. The TPO had finally selected 27 concerns as comparables. The CIT(A) excluded 18 concerns and the assessee before us is contesting the inclusion of 14 concerns. Accentia Technologies Ltd. is found to be functionally not comparable and also owing to the amalgamation of two companies namely, Iridium Technologies Ltd. and Geo Soft Technologies Ltd. Similarly, Bodhtree Consulting Ltd. is excluded; the comparable being mainly into software solutions. Similarly, we find Eclerx Services, Informed Technologies India Ltd. are KPO hence cannot be taken into consideration as a comparable. The concern Infosys BPO Ltd. is engaged in diversified activities and owns intangible and hence cannot be included as comparable. Owing to the reported fraud in the management Maple e-Solutions and Traton Corporation Ltd. cannot be considered as right comparables. The concern High Services Ltd. are providing high-end services and is engaged in web hosting which is not functiona ..... X X X X Extracts X X X X X X X X Extracts X X X X
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