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TMI Blog2016 (5) TMI 1541X X X X Extracts X X X X X X X X Extracts X X X X ..... pment services to its AE. Therefore, the assessee is purely a captive service provider. The assessee has been recognised as 100% EOU registered under the Software Technology Park of India (STPI) Scheme. As per the terms of the contract with its AE, the assessee is remunerated at cost plus 12.01% for the services rendered by it to its AE. For the impugned assessment year, the assessee earned revenue of Rs. 107,28,61,819/- from international transaction with its AE. The assessee for the impugned assessment year filed its return of income on 30-09-2008 declaring total income of Rs. 10,13,83,900/-. Along with return of income, the assessee also submitted a TP study report wherein transaction Net Margin Method (TNMM) was adopted as most appropriate method and operating profit/operating cost as the profit level indicator (PLI). The assessee in the TP study, after conducting a search in the data bases on the basis of functions, assets and risk (FAR) analysis, selected 18 companies as comparables with an average margin of 10.98% as against assessee's margin shown at 12.01%. Hence, the price charged to the AE was considered to be within arm's length. 3. During scrutiny assessment proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this appeal raising various grounds both on transfer pricing issues as well as corporate tax issues, which are as follows: "1. General 1.1 Based on the facts and circumstances of the case and in contrary to law, D.E. Shaw India Software Private Limited (hereinafter referred to as 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income Tax, Circle 1(2), Hyderabad (hereinafter referred as 'AO') in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred as 'DRP'), Hyderabad dated 03 August 2012 under section 253 of the Income-tax Act, 1961 (Act'). 2. Transfer Pricing Adjustments 2.1 General Grounds 2.1.1 The assessment order passed by the Learned AO under section 143(3) read with section 144C and read with the order passed by the Learned Transfer Pricing Officer (hereinafter referred as 'TPO'), under section 92CA(3) of the Income Tax Act, 1961 (hereinafter referred as 'the Act') is bad in law and void abinitio. 2.1.2 The Learned AO/ DRP erred in holding that the Arm's Length Price (hereinafter referred as 'ALP') of internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 10B(3) of the Rules that specify that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions. 2.5.2 The Learned AO/DRP erred in disregarding the differences in risk profile of the Appellant (being a captive service provider) and the alleged comparable companies selected by him, by not allowing the risk adjustment made by the Appellant. 2.5.3 The Learned AO/DRP ought to have appreciated that dissenting DRP member agreed to the contention of the Appellant that risk adjustment should be provided to the Appellant. 2.6 Com parables 2.6.1 Without prejudice to above, the Learned AO/DRP erred in confirming the TPO's stand of rejecting the independent comparable companies selected by the Appellant in its transfer pricing study report without providing any cogent reasons. 2.6.2 The Learned AO/DRP erred in confirming the acceptance of alleged comparable companies selected by the TPO without proper reasoning. 2.6.3 The Learned AO/DRP erred in rejecting the comparable companies selected by the Appellant by stating that outsourcing cost cannot be considered as employee cost. 2.6.4 The Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support of such contention, the learned AR submitted a copy of the order passed by the ITAT, Hyderabad Bench "B" in case of of M/s Intoto Software India (P) Ltd., in ITA No.1810/Hyd/201 relating to the assessment year 2008-09. The learned AR further submitted that the facts of the assessee's case being identical to that of M/s Intoto Software India (P) Ltd.,(supra) the order passed by the co-ordinate Bench squarely covers the issue with regard to the comparables objected to by the assessee. 8. With regard to AVANI CIMCON TECHNOLOGY LIMITED, the learned AR submitted that the website of Avani Cimcon Technology Limited clearly reveals that the said company is engaged in product development, hence is functionally different from the assessee. He submitted that segmental information is not available. The learned AR further submitted that in case of M/s Intoto Software India (P) Ltd., (supra) the Tribunal has directed exclusion of Avani Cimcon from the list of comparable companies. He relied on the following cases: 1. NTT Data India Enterprise Application Services Ltd., ITA No. 1862/Hyd/2012. 2. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1303/Bang/2012. 3. Trilogy E-Business Softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n both software development and product development and owns intellectual property in the form of patents. In support of such contention, the learned AR relied upon decisions of the co-ordinate bench in the case of M/s Intoto Software India (P) Ltd. (supra) as well as in the following decisions: 1. NTT Data India Enterprise Application Services Ltd., ITA No. 1862/Hyd/2012. 2. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1 303/Bang/2012. 3. Patni Telecom Solutions Pvt. Ltd., ITA No. 1846/Hyd/12 13. The learned AR objecting to selection of TATA ELXSI LIMITED as a comparable submitted that the said company cannot be considered as a comparable to the assessee as it is engaged in product designing services. The learned AR submitted that the ITAT Hyderabad Bench in case of Intoto Software India (P) Ltd. (supra) has excluded the said company from the list of comparables. He also relied on the following decisions: 1. NTT Data India Enterprise Application Services Ltd., ITA No. 1862/Hyd/2012. 2. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1303/Bang/2012. 14. The ld. AR objecting to the selection of Persistent Systems Ltd., as a comparable submitted that this company is eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted in case of M/s Intoto. Therefore, in our view, the decision of the co-ordinate bench in case of M/s Intoto Software India Pvt. Ltd.(supra),will also apply to the facts of the present case in so far as selection of comparables are concerned. The coordinate bench in case of Intoto Software India Pvt. Ltd., held as follows: 7. Having considered the rival contentions and the material on record, we find that the Coordinate Bench of this Tribunal in the case of NTT Data India Enterprise Application (cited supra), has recorded the following reasons for exclusion of the following companies from the final list of comparables. "2. SELECTION OF COMPARABLES. 9. The next issue for consideration is with reference to selection of comparables. As briefly stated above, TPO selected 19 companies as comparable companies out of which, one company viz., Celestial Bio Labs was deleted by DRP. Out of the balance 18 comparables, assessee is objecting to selection of 8 comparable companies which are as under : 1. Avani Cincom Technologies Ltd., 21.65% 2. Bodhtree Consulting Ltd., 19.14% 3. E-Zest Solutions Ltd., 28.95% 4. Infosys Technologies Ltd., 40.41% 5. Kals Informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Nonfurnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 5. KALS Information Systems Ltd., : 10.4. We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the coordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 14 ITA.No.1810/Hyd/2012 Intoto Software India P. Ltd., Hyderabad. set of comparables in the case on hand. It is ordered accordingly. 8. Wipro Ltd., 12.4.1. We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company 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. 12.4.2 We also find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems Ltd. 17.1.1. This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2. Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that (i) This company is engaged in software designing ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies 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 engineer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company 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 coordinate 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. 7.4. Therefore, respectfully following the decisions of the Coordinate Bench of the Tribunal (supra), we direct that thes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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