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TMI Blog2021 (9) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Appellant : Sumeet Khurana, CA For the Respondents : Muzaffar Hussain, CIT-DR ORDER Per George George K., JM This appeal at the instance of the assessee is directed against CIT(A)'s order dated 11.11.2019. The relevant assessment year is 2010-2011. 2. All the grounds raised relate to transfer pricing adjustment. The assessee has raised four grounds and various sub-grounds. The learned during the course of hearing had only pressed ground No. 2.8, 2.10 and additional ground (The additional ground was raised vide petition dated 04.03.2021. The ground Nos. 2.8 and 2.10 and additional ground reads as follow:- 2.8. Including the following comparable companies even though they are functionally different from operational profile of the appellant: (a) Infosys Technologies Limited. (b) Persistent Systems Limited (c) ICRA Techno Analytics Ltd. (d) KALS Information Systems Ltd.; and (e) Tata Elxsi Ltd. 2.10. Computing the working capital adjustment and in limiting the working capital adjustment while determining the arm's length price. Additional Ground: On the facts and in the circumstances of the case and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be examined for adjudication of the additional ground, we take the same on record and proceed to adjudicate the additional ground. We shall adjudicate the above grounds as under: Ground No. 2.8 and Additional Ground 3. In the above grounds, the assessee is seeking to exclude following companies from the list of comparables. (a) Infosys Technologies Limited. (b) Persistent Systems Limited (c) ICRA Techno Analytics Ltd. (d) KALS Information Systems Ltd.; and (e) Tata Elxsi Ltd. (f) Larsen Toubro Infotech Limited. 4. Brief facts of the case are as follow:- The assessee is a company. It is a subsidiary of Signum International, Luxemburg. The assessee-company provides software development services (SWD) and I.T. enabled services (ITES) to its AEs. The financial results of the assessee-company for the year ending 31.03.2010 as per the transfer pricing document are as follow:- Operating Revenue : ₹ 15,59,11,881 Operating Expenses : ₹ 14,30,86,997 Operating (Profit/Loss) : ₹ 1,28,24,884 Op profit on cost % : 8.96% 4.1. The assessee had entered into international transaction with its AEs for the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Communication Technologies 17.36% 10 Tata Elxsi (Seg.) 20.93% 11 Thinksoft Global Services Ltd. 17.05% Average 22.71% 4.4. Aggrieved by the transfer pricing adjustment in SWD segment, the assessee preferred an appeal to the first appellate authority. The CIT(A) upheld the transfer pricing adjustment made by the AO/TPO. The CIT(A) did not specifically dealing with the objections of the assessee with regard to the exclusion of each of the comparables. The relevant findings of the CIT(A) are as follows:- As there is no infirmity in determining the arm's length price of the international transactions entered into by the taxpayer by using the TNMM as most appropriate method and the PLI of the comparables based on the financial results of the companies for F.Y. 2009-10 as mandated under rule 10B(4) of the Income-tax rules, I hereby uphold the order of the TPO. 4.5. The assessee being aggrieved is in appeal before the Tribunal. As mentioned earlier, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables. 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development housing and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. 7.1.2 In view of the decision of the Co-ordinate Bench, cited supra, we direct the AO/TPO to exclude the comparable on similar reasons. 5.3. Since the assessee is a capital service provider, catering the needs of AEs in the SWD segment, ICRA Techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry. 20. In view of the above facts that Infosys Ltd. Having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE. 7.2.3 In view of the decision of the Co-ordinate Bench, cited supra, we direct the AO/TPO to exclude Infosys Limited as comparable, on similar reasons. 6.3. In view of the aforesaid order of the Co-ordinate Bench of the Bangalore Tribunal in the case of Cisco Systems (India) (P.) Ltd. (supra), we hold that Infosys Limited cannot be stated to be functionally comparable to the assessee. Therefore, we direct the AO/TPO to exclude Infosys Limited from the final list of comparables. (c) KALS Information Systems Limited 7. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reater than 10 times the turnover of the assessee (113 times the turnover of the assessee). It is further submitted that the said company is functionally dissimilar as there is no bifurcation between revenue earned from software products and software development services. It is also contended that the said company owns intangible assets. Thus, it is prayed that the above company may be excluded from the final list of comparables. The assessee has also relied on various orders of the Bangalore Bench of the Tribunal, including the order in the case of Marlabs Innovations (P.) Ltd. v. ACIT reported in 116 taxmann.com 725. 8.1. The learned Departmental Representative supported the orders of the AO/TPO. 8.2. We have heard both parties. We find that the Bangalore Bench of the Tribunal in the case of Marlabs Innovations (P.) Ltd. v. ACIT (supra) had held that Larsen Toubro Infotech Limited is not functionally comparable to the assessee. The relevant finding of the Tribunal, reads as follow:- 12.3. We have perused submissions advanced by both sides in light of records placed before us. We note that Ld. AO/TPO has applied filter of more than ₹ 1 crore but did not put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fotech Limited from the final list of comparables. (e) Persistent Systems Limited 9. The assessee is seeking to exclude Persistent Systems Limited from the list of comparable companies as the said company is functionally different from that of the assessee, as the said company is engaged in rendering outsourced product development services, offers complete product life cycle services. Further, it had 3000 plus product releases in the last five years. The said company is also develops products like ChemLMS, VieMOR, CLAP, TLALOC. Thus, it is prayed that the above company may be excluded from the final list of comparables. In this context, the learned AR relied on the order of the Bangalore Bench of the Tribunal in the case of Cisco Systems (India) (P.) Ltd. (supra). 9.1. The learned Departmental Representative supported the orders of the AO/TPO. 9.2. We have heard both parties. We find that the Bangalore Bench of the Tribunal in the case of Cisco Systems (India) (P.) Ltd.(supra) had held that Persistent Systems Limited is not functionally comparable to the assessee. The relevant finding of the Tribunal, reads as follow:- 7.4.1 After hearing both the parties and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, in view of the order of the Co-ordinate Bench of the Tribunal (supra), we direct to exclude Tata Elxsi Limited from the final list of comparables. 7.5.3 In views of the aforesaid reasonings, we are of the opinion that the learned DRP is justified in excluding the above five comparable companies from the final list of comparables. Accordingly, this ground of appeal by the Revenue is dismissed. 10.3. In view of the order of the Co-ordinate Bench of the Tribunal in the case of Cisco Systems (India)(P.) Ltd. (supra), we find that Tata Elxsi Limited cannot be compared with the assessee company, and thus, we direct the AO/TPO to exclude the said company from the final list of comparable companies. Ground No. 2.10 (Working Capital Adjustment) 11. The working capital adjustment claimed by the assessee was restricted to 1.98% by the TPO (refer para 12.1 of TPO's order). The view taken by the TPO was affirmed by the CIT(A), by observing as under:- The working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009. In this case, the average PLR. adopted by SBI, the largest scheduled bank, for short term working cap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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