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TMI Blog2020 (6) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... h law. In the light of aforestated observations and directions, the transfer pricing issues raised by assessee is set aside to Ld.AO/TPO. Ld.AO/TPO is directed to pass a detailed order by considering all the submissions advanced by assessee. Erroneous computation of working capital adjusted mark-up of certain comparable - HELD THAT:- We direct Ld.AO/TPO to provide for correct working capital adjustment and to compute margines of comparables in accordance with law. Deduction u/s 10 A disallowance - HELD THAT:- Both parties submitted that, the issue now squarely covered with the decision of Hon ble Karnataka High Court in case of Tata Elxsi Ltd., vs CIT[ 2011 (8) TMI 782 - KARNATAKA HIGH COURT ] wherein held that, what is reduced from export turnover should also be reduced from the total turnover. CIT(A) granted relief to assessee following the aforestated view expressed by Hon ble Karnataka High Court. No infirmity in the view taken by Ld. CIT(A) and same is upheld. Comparable deselected having huge turnovers more than 200 crores - HELD THAT:- Admittedly these comparables have huge turnover as compared to that of assessee. TPO while applying turnover filter, excluded comparables les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covery is in relation to software discovery of new drugs. Moreover, the company also owns IPR. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. We therefore accept the plea of the Assessee in this regard. Further for assessment year immediately preceding the year under consideration this Tribunal excluded this company for very same reasons. Revenue has not brought anything contrary on record to show that there is any change in financials of this comparable for year under consideration vis-a-vis assessment year 2006-07. We therefore do not find any reason to deviate from the view taken by this Tribunal in assessee s own case. We direct Ld. AO/TPO to exclude this comparable from the finalist. Flextronics Software Systems Ltd. - This comparable has been selected by Ld.TPO in final list and excluded by Ld.CIT(A) for the reason that it fails 0% RPT filter - HELD THAT:- As we have already held that) % RPT is not an appropriate filter, we reject the reasoning by Ld. CIT(A) for its exclusion. We direct Ld. TPO to retain this company from final list. ITES segment - Comaparability - Eclerx Services Ltd c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. [corresponding to original GoA No. 3(a)] (ii). The Ld. CIT(A) erred in applying related party transaction filter at zero percent instead of 15% filter which has been upheld by Jurisdictional Income tax Appellate Tribunal in various cases. [corresponding to original GoA No. 3(b)] (iii) The Ld. CIT(A) erred in law and on facts in upholding the comparability analysis performed by the Ld. TPO, who failed to appreciate no financial data was available and thereby wrongly included the company Accurate Data Converters Ltd, Ld. [corresponding to original GoA No. 3(c)] (iv). The Ld. CIT(A) erred in law and on facts in rejecting a company in the ITeS segment for the reason that the SWD segment of this company was not comparable to that of the Appellant. - Flextronics Software Systems Limited (Seg,) [corresponding to original GoA No. 3(d)] 4) The lad. CIT(A) erred in law and on facts by upholding the Ld. TPO's approach of using the single year data pertaining to financial year 2006-07 available at the time of assessment proceedings instead of multiple year data used by the Appellant. [corresponding to original GoA No. 3(e) and 3(f)] 5) The IA CIT(A) erred in law and on facts in upholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les. 7. The Ld. CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from the appellant company. 8. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that M/s Celestial labs Ltd, M/s Flextronics Software Systems Ltd and M/s Tata Elxsi Ltd in SWD segment and M/s Eclerx Services Ltd M/s Moldtek technologies Ltd in ITES segments being functionally different, cannot be taken as comparables. 9. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. Brief facts of the case are as under: 2. Assessee filed its return of income on 30/10/2007 declaring total income of ₹ 88,89,272/-. Return was processed under section 143 (1) of the Act and case was selected for scrutiny. Accordingly, notice under section 143 (2) was issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. No. Comparables Margin Margin 1. Allsec Transmatic Ltd (SEG) 18.91% 2. Avani Cincom Technologies Ltd 49.97% 3. Celestial Labs Ltd 53.06% 4. Datamatics Ltd -1.81% 5. e-Zest Solutions Ltd 34.85% 6. Flextronics Software Systems Ltd (SEG) 23.85% 7. Geometric Ltd (SEG) 8.42% 8. Helio and Matheson Information Technology Ltd 33.23% 9. iGate Global Solutions Ltd 4.42% 10. Infosys Technologies Ltd 37.76% 11 Ishier Infotech Ltd 29.20% 12. KALS Information Systems Ltd 22.22% 13. LGS Global Ltd 13.95% 14. Lucid Software Ltd 15.84% 15. Mediasoft Solutions Ltd 0.39% 16. Megasoft Ltd 0.12% 17. Mindtree Ltd (TP study comparable) 4.16% 18. Persistent Systems Ltd 2.23% 19. Quintengra Solutions Ltd 8.04% 20. RS Software India Ltd 1.93% 21. R Systems International Ltd (SEG) 2.04% 22. SaskenCommunications Technologies Ltd (SEG) 9.88% 23. SIP Technologies and Exports Ltd (TP study comparable) 9.50% 24. Tata Elxsi Ltd (Seg.) 4.96% 25. Thirdware Solutions Ltd 0.32% 26. Wipro Ltd 3.27% Average Margin 21.95% 2.5. ITES segment Sl. No. Comparables Margin Margin 1. Maple Esolutions Ltd 29.30% 2. Triton Corpn Ltd 26.75% 3. Accentia Technologies Ltd 25.24% 4. Aditya Birla Minacs Worldwide Ltd (Transworks Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., Flextronics Software Systems Ltd (SEG) Tata Elxsi Ltd (SEG) Wipro Ltd (SEG) ITES segment Infosys BPO Ltd Eclerx Services Ltd Moldtech Technologies Ltd Wipro Ltd 3.3. Before we undertake comparability analysis of above comparables, it is sine qua non to understand functions performed, assets owned and risks assumed by assessee under both segments as observed by Ld. TPO in order passed under section 92C of the Act. 3.3.1. Software development segment Functions As per the taxpayer, there is no change in the functional profile of the taxpayer during the FY 2005-06. NetApp's functions arc carried out from its offices located at Bangalore, Mumbai and Delhi. The Bangalore centre, being the principal office and India headquarters of the company, houses the top management. NetApp India derives its revenue from the software design and, marketing sales support and IT enabled services it provides to NetApp Group. In summary, NetApp India's functions were restricted to (a) software design development; (b) marketing and sales support and (d) IT enabled services to NetApp Group The taxpayer performs software development services on a contract basis to its AE, NetApp Group, US. As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axpayer also deploys well qualified workforce in its business. The tax payer also owns computers, servers etc which are essential to the business of an IT enabled company. During the financial year 2005 06, the assets employed by NetApp India (after depreciation) as on March 31, 2006 are already discussed under the head Software Development Services . 3.3.3. Based on above FAR analysis under both segments, assessee can be characterised as contract service provider, for software development and ITES segment, that assumes less than normal risk associated with carrying out its business. Assessee s appeal: 4. Ground No.1 is general in nature and therefore do not require any adjudication. 4.1. Ground no.3(i) (iv),4,5 are in respect of comparables alledged for exclusion/inclusion under software development segment and Information Technologies Service Segment. 4.1.1. Ld.Counsel submitted that, most of the comparables alleged by assessee as well as revenue for inclusion/exclusion has been considered by this Tribunal in assessee s own case for assessment year 2008 09 in ITA.No.881 and CO.No.156/B/2013 and assessment year 2006 07 in ITA No.1480/B/2010. He also submitted that, all other compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, this company is to be excluded from the list of comparables on the basis of finding of this Tribunal in case of First Advantage Offshore Services Pvt. Ltd., (supra). He submitted that, facts of the case before us are similar and, therefore, the said decision is applicable to the assessee s case also. The Ld.DR however objected to the exclusion of this company from the list of comparables. On a careful perusal of material on record, we find that this Tribunal in case of First Advantage Offshore Services Pvt. Ltd., (supra) took note of dissimilarities between assessee therein and Lucid software Ltd.,. As observed therein, this company was involved in development of software as compared to captive software service provider. As the facts of the case before us are similar, respectfully following the decision of the coordinate bench, we hold that these 2 companies are also to be excluded. Respectfully following the decision of this Tribunal referred to above, we direct the Ld. AO/TPO to exclude this company from final list of comparable. c) e-Zest Solutions Ltd., This company has been selected by Ld.TPO and objected by assessee on the ground that, it was functionally different from as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the aforesaid case, we hold that this company, i.e. e- Zest Solutions Ltd., be omitted from set of comparables for period under consideration We therefore direct Ld. TPO to exclude this company from final list. d) Avani Cincom Technologies Ltd., It has been submitted that, this company is functionally different from the assessee. Based on the information available in company s website, it has been submitted that, this company developed a software product by name DXchange . It was also submitted that, this company has revenue from software product sales, apart from rendering of software services for which segmental information is not available. It has therefore been submitted that this company is functionally different from assessee. It was further submitted that, Mumbai Bench of Tribunal in case of Telcordia Technologies Pvt. Ltd., v. ACIT in ITA No.7821/Mum/2011 accepted assessee s contention that this company has revenue from software product and observed that, in absence of segmental details, Avani Cincom cannot be considered as comparable to an assessee who was rendering captive software development services. Ld.DR, on the other hand, relied on order of Ld.TPO. We have cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. (ii) In the case of E-Gain communications Pvt. Ltd., (2008-TII-04-ITAT-PUNE-TP), the Tribunal has directed that, this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased margins of the company. Ld. AR prayed that, in the light of above facts and in view of the afore cited decision of this Tribunal (supra), this company ought to be omitted. Per contra, Ld.CIT DR supported action of Ld.TPO in including this company in the list of comparables. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that, company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by Ld.Counsel, Pune Bench of this Tribunal in case of E-Gain Communications Pvt. Ltd., (supra) held that since income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... job and therefore fails employee cost filter it has been submitted that business model therefore of this comparable is very different from that of assessee that is providing services only to its AE s on contract basis. It has been submitted that, for assessment year 2006 07 this comparable has been excluded by this Tribunal in assessee s own case in IT(TP)A No.1480/B/2010. Ld.Counsel submitted that, copy of decision is placed at page 3534 of paper book. On the contrary, Ld.CIT DR relied upon orders of authorities below and submitted that functions performed by this company is akin to ITeS services rendered by assessee to its AE and therefore should be retained. We have heard submissions advanced by both sides in light of records placed before us. It is observed from annual report at page 2432 of paper book in Schedule 15 and 16 that salary and wages expenditure of this company is only 2.3% of total revenue which shows that company outsources services to 3rd parties. Further for assessment year immediately preceding the year under consideration this Tribunal excluded this company for very same reasons. Revenue has not brought anything contrary on record to show that there is any ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er should also be reduced from the total turnover. It is observed that Ld. CIT(A) granted relief to assessee following the aforestated view expressed by Hon ble Karnataka High Court. We do not find any infirmity in the view taken by Ld. CIT(A) and same is upheld. Accordingly, this ground raised by revenue stands dismissed. 6. Ground no.6-7: 6.1. Ld.CIT DR at the outset, in respect of Tata Elxsi Ltd, Wipro Ltd, Infosys Technologies Ltd, Infosys BPO Ltd., alleged for inclusion under 2 segments, placed reliance upon orders passed by authorities below. 6.2. Ld.Counsel submitted that, these comparables have been excluded by Ld.CIT(A) for huge turnover. He submitted that, this tribunal have been consistently following turnover limit of 1 to 200 crores for a captive service provider whereas these comparables have huge turnovers which is more than 200 crores and hence Ld.CIT (A) was right in excluding these comparables. 6.3. We have perused submissions advanced by both sides in light of records placed before us. It is observed that, admittedly these comparables have huge turnover as compared to that of assessee. Ld.TPO while applying turnover filter, excluded comparables less than 1 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted party transaction at 15%. Similarly, in regards to ITES segment, Ld.CIT(A) excluded 18 comparables, out of which few has been alleged for exclusion on functional dissimilarities which has been dealt with herein below. We direct Ld. AO/TPO to reconsider balance comparables in light of various decisions and also as decided in assessee s own case for immediately preceding and succeeding assessment years. We direct Ld. AO/TPO to keep threshold for related party transaction at 15%. Accordingly, this ground raised by revenue as well as assesseestands allowed for statistical purposes. 8. Ground no.8: These grounds are raised by revenue challenging exclusion of following comparables under both segments. 8.1. Software Development Service Segment a) E infochips Ltd: Ld.TPO included this company in the list of comparables. Ld.Counsel contended that this company is functional dissimilar, in as much as it is engaged in software development and IT enabled services and also Products. Ld.TPO included this company into final list as it has 2 heads of income being income from software development and income from IT services which together amounts to 86% of total income of the company. Ld. TPO op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur attention to 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 manufacture industrial enzymes. This facility would also include the research laborator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et, manufacture, retail, travel etc and therefore is functionally not comparable with a captive service provider like that of assessee. We have perused submissions advanced by both sides in light of records placed before us. It is observed from the annual report that this company is into knowledge process outsourcing by providing that analytics and data process solutions to global enterprise clients. Coordinate bench of this Tribunal in case of e4e Business Solutions India Pvt. Ltd., wherein it is held that, this company supports core and complex activities for its clients using proprietary processes and scalable offshore delivery model. It is also been observed therein that this company is engaged in diversified activity of providing services including analytic services etc and is not functionally comparable with a simple BPO service provider. Before us Ld.CIT DR has not brought on record anything contrary to the view expressed by this Tribunal in case of e4e Business Solutions India Pvt. Ltd., (supra). It is also observed that in assessee s own case for assessment year 2009 10 this comparable has been excluded in ITA No. 1614 and 1633/B/2014. Respectfully following the same, we d ..... 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