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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 ..... liable to be quashed. [corresponding to original grounds of appeal ("GoA") No. 1] 2) The CIT(A) erred in not deleting the entire adjustment made to the arm's length price of the international transactions by the AO amounting to INR 114,032,864 in respect of software development services ("SWD") segment and INR 4,601,438 with respect to information technology services ("ITeS") segment. [corresponding to original GoA No. 2] 3) (i). The Ld. CIT(A) erred in law and on facts in upholding the comparability analysis performed by the Ld. Transfer Pricing Officer ("TPO") in its TP Order and thereby wrongly upholding inclusion of various comparable in IT and ITeS segments which are functionally dissimilar. [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length price under the provisio to Section 92C(2) of the Act. 5. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the TPO ought to have excluded comparables having any related party transactions, not only those with more than 25% related party transactions of sales 6. The CIT(A) erred in holding that the size, turnover & brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys technologies Ltd & M/s Wipro Ltd (Seg.) in software development segment and Infosys BPO Ltd and Wipro Ltd (seg.) in ITES segment as comparables. 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate method for software development services and technical and customer support services (hereinafter known as ITES services) and OP/TC as PLI for computing the margin under these segments. Assessee computed 10% to be its margin for both segments under dispute. 2.3. For software development segment, assessee used 18 comparables with average margin of 13% and 4 ITES segment assessee used 12 comparables with average margin of 12%. Thus, it is held the price to be at arm's length. Ld.TPO rejected the transfer pricing analysis carried out by assessee as according to him it suffered certain defects. Ld.TPO thus applied various filters to reject comparables selected by assessee. 2.4. Ld.TPO selected new set of comparables under both segments as under: Software Development Segment Sl. 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Ld.CIT(A), both assessee as well as revenue are in appeal. 3. At the outset Ld.Counsel submitted that, in revised grounds of appeal, Assessee seeks exclusion/inclusion of following comparables under both segments: Software Development Segment Comparable Sought for Exclusion: * Avani CincomTechnologies * KALS Information Systems Ltd * Lucid Software Ltd * e-Zest Solutions Ltd * Thirdware Solutions Ltd. * Persistant Systems Ltd., ITES segment Comparables Sought for Exclusion: * Vishal Information Technologies Ltd Comparables Sought for Inclusion: * Flextronics Software Systems Ltd 3.1. Ld.Counsel submitted that, by considering above comparables for inclusion/exclusion assessee would be within the margin of +/-5%. However, he reserved his right to argue other comparables in an appropriate situation. 3.2. In revenue's appeal, following are the comparables sought for inclusion under both segments: Software Development Service Segment * E Infochips Ltd., * Celestial Labs Ltd., * Infosys Technologies Ltd., * Flextronics Software Systems Ltd (SEG) * Tata Elxsi Ltd (SEG) * Wipro Ltd (SEG) ITES segment * Infosys BPO Ltd * Eclerx Services Ltd * M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NetApp Group. All companies of the Group leverage from these intangibles for continued growth in revenues and profits. Accordingly, NetApp India does not own any significant non-routine intangibles. 4.3 Risks It is claimed that being a captive service provider and being compensated on Cost plus mark-up basis, the taxpayer bears limited risk. It mentioned various risks like market risk, product & technology risk, credit risk and foreign exchange risk which are normal in the case of independent entrepreneurs. The risk profile of the taxpayer vis-a-vis other comparables has been dealt with in detail later in this order under the head "Risk Adjustment". 3.3.2. ITES segment Functions The taxpayer performs IT enabled services on a contract basis to its AE, NetApp, US. As per the Services Agreement for IT enabled services between NetApp India and NetApp, USA. NetApp India works cost plus mark up basis. Assets As is common in the case of IT enabled service provider companies, the technical manpower employed and trained by a company and communication equipment are its most important asset. Taxpayer also deploys well qualified workforce in its business. The tax payer also owns comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for year under consideration vis-a-vis assessment year 2006-07 & 2008-09. We therefore do not find any reason to deviate from view taken by this Tribunal in assessee's own case. Respectfully following the same, we direct Ld. AO/TPO to exclude this comparable from the finalist. b) Lucid Software Ltd This comparable was included by Ld.TPO and objected by assessee for its functional dissimilarities. It has been submitted that, this company is involved in R & D with leading scientific institutions. Ld.Counsel submitted that, this Tribunal in the case of First Advantage Offshore Services Pvt. Ltd., Vs. DCIT IT(TP)A No.1086/Bang/2011 for AY: 2007 - 08 held that, this company is not comparable in case of software development services provider. The nature of services rendered by assessee in present appeal and the assessee in case of First Advantage Offshore Services Pvt. Ltd., (supra) are one and the same. This fact would be clear from the fact that very same 26 companies were chosen as comparables in case of the assessee as well as in case of First Advantage Offshore Services Pvt. Ltd., (supra). Ld.Counsel submitted that, this company is to be excluded from the list of comparables o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewlett Packard (I) Ltd., Vs. DCIT in ITA No. 1031/Bang/2011. On the contrary, Ld. DR supported the inclusion of this company in the list of comparables by the TPO. We have heard the rival submissions and perused and carefully considered material on record. It is seen from record that, Ld.TPO included this company on the basis of statement made by the company in its reply to notice under section 133(6) of the Act. It appears that Ld.TPO did not examine services rendered by this company to give a finding whether services performed by this company are similar to Captive software development services performed by assessee. From details on record, we find that while assessee is a captive software development service provider, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high-end technical services which come under category of KPO services. It has been held by co-ordinate bench of this Tribunal in case of Hewlett Packard (I) Ltd., Vs. DCIT (supra) that KPO services are not comparable to software development services and are therefore not comparable. Following aforesaid decision, of Tribunal in the aforesaid case, we hold that this company, i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 this company was excluded for similar reasons. Revenue has not been able to place on record any details contrary to the observations made by this Tribunal for assessment year 2008-09 and therefore, we do not find any reason to deviate from the view taken therein. We, therefore, direct Ld.TPO to exclude this company from final list. e) Thirdware Solutions Ltd., This company was proposed for inclusion in the list of comparables by Ld.TPO. Before Ld.TPO, assessee objected to inclusion of this company in the final list on the ground that its turnover was in excess of Rs. 500 Crores. Before us, assessee has objected to 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, Ld.Counsel submitted as under:- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from Annual Report that, company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have perused the submissions on the basis of the records. It is observed that, assessee has developed software during the year, and has earned royalties from sale of products. Assessee has earned revenues from Licensing of products. It is also observed from the notes to the accounts of this company that the segment information has been provided on consolidated financial statements. It is also observed that assessee owns the software developed by it on which depreciation is claimed. Thus, this company has been characterised itself as engaged in providing outsourced product development services to independent software vendors and enterprises. It has been characterised to having earned significant portion of its revenues from export of software services and products. This function, the assets owned by this company and the risk assumed are not comparable with that of the present assessee and hence has to be excluded from final list of comparables. Accordingly, this comparable is directed to be excluded from finalist. 4.1.3. ITES segment Comparables Sought for Exclusion: a) Vishal Information Technologies Ltd. Ld.Counsel submitted that, this comparable was outsourcing its job ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ground raised by assessee stands allowed for statistical purposes. 4.3. Ground no.7 is against erroneous computation of working capital adjusted mark-up of certain comparables. We direct Ld.AO/TPO to provide for correct working capital adjustment and to compute margines of comparables in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes. 5. Revenue appeal: 5.1.Ground Nos.1,4,9,10 are general in nature, therefore do not require any adjudication. 5.2. Ground Nos. 2-3: It is observed that revenue in their appeal has raised the issue of 10 A disallowance being deleted by Ld.CIT(A). 5.2.1. Ld.CIT DR placed reliance upon order passed by Ld. AO/TPO. 5.2.2. Ld.Counsel placed reliance upon decision of Hon'ble High Court in case of Tata Elxi & Ors vs CIT, reported in (2012) 349 ITR 98. 5.2.3. We have perused submissions advanced by both sides in the light of the records placed before us. At the outset, 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, reported in (2012) 349 ITR 98, wherein Hon'ble court held that, what is reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by this Tribunal. It is observed that, Ld.CIT(A) rejected various comparable for not satisfying the criteria of 0% RPT. It has been submitted that Ld.TPO considered comparables with RPT less than 25%, whereas Ld.CIT(A) rejected comparables, that do not satisfy 0% RPT. It has been submitted that, various decisions of this Tribunal have accepted comparables having RPT less than 15%. It is noted that, in software development service segment, Ld.CIT(A) excluded 21 comparables for not satisfying 0% RPT, leaving behind 3 comparables which has been challenged by assessee for exclusion before us and has been dealt with and excluded on functional dissimilarities in paragraphs hereinabove. We note that, there is no comparables left for computing margin under software development service segment. It is imperative under such circumstances to revisit remaining comparables excluded by Ld. CIT(A) by applying 0% RPT filter, under software development service segment. We direct Ld. AO/TPO to carry out functional comparability of remaining 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. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al data of this company is available indicating operating profit from software development services, we direct Ld.TPO to exclude this company from list. b) Celestial Labs Ltd., As far as this company is concerned, the stand of Ld. Counsel is that it is a research & development company. In this regard, the following submissions were made:- In the Director's Report, it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act." As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure", it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly instalments from the year in which it is incurred." An amount of Rs. 11,692,020/- has been debited to the Profit and Loss Account as "Deferred Revenue Expenditure". This amounts to nearly 8.28% of sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Respectfully following the same, we direct Ld. AO/TPO to exclude this comparable from the finalist. c) 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. Both sides seek exclusion of this comparable. 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. 8.2. ITES segment a) Eclerx Services Ltd Ld.Counsel submitted that, this comparable has been rejected by Ld.CIT (A) and revenue is alleging for its inclusion. Ld.CIT DR submitted that this company is in the business of ITES and is functionally comparable with that of assessee. It has been submitted that, this company provides complete end to end solution to its clients by combining people, process the engineering and automation. Ld.Counsel submitted that this company is diss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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