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TMI Blog2014 (6) TMI 997X X X X Extracts X X X X X X X X Extracts X X X X ..... in is found to be within Arm’s length, then, issue of risk adjustment may not arise. This ground of the assessee is considered to be allowed for statistical purposes. Excluding communication expenses from the export turnover while computing deduction u/s 10A - Held that:- This issue is squarely covered by the decision of the Hon’ble Bombay High Court in case of CIT Vs. Gemplus Jewellery [2010 (6) TMI 65 - BOMBAY HIGH COURT] and ITO Vs Saksoft Ltd (2009 (3) TMI 243 - ITAT MADRAS-D). Following the ratio laid down in the aforesaid judgments, we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10A of the Act. - ITA No. 1500/Hyd/2010 - - - Dated:- 20-6-2014 - SHRI SAKTIJIT DEY J Shri Ravi Bharadwaj for the Appellant. Shri D. Sudhakar Rao for the Respondent. ORDER: This appeal of the assessee is directed against the order dated 11/10/2010 passed u/s 143(3) of the Act in pursuance of the directions issued by the Dispute Resolution Panel (DRP). The appeal pertains to the assessment year 2006-07. 2. Briefly the facts are, the assessee an Indian Company is wholly owned subsidiary of Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see of ₹ 18,25,29,242/-. Thus, the resultant short fall of ₹ 1,58,53,227/- was treated as adjustment to be made u/s 92CA of the Act. In consequence to the order passed by the TPO, the AO formulated a draft assessment order adding the transfer pricing adjustment of ₹ 1,58,53,227/-. Further, the AO also made adjustment to the deduction claimed u/s 10A of the Act by reducing communication charges of ₹ 8,00,1,768/- from the export turnover. Being aggrieved of the draft assessment order, the assessee raised objections before the DRP. 3. The DRP having rejected all objections raised before it, the AO passed final assessment order, which is under challenge in the present appeal. 4. Ground Nos. 1 to 12 are on transfer pricing issues. At the outset, the learned AR expressed his intention not to press Ground Nos. 1,2,3,4,5,6, 10 12. In respect of rest of the grounds including additional ground also, the learned AR restricted his submissions with regard to selection/rejection of comparables by the TPO and sustained by DRP as well as issue of risk adjustment. Out of the 20 comparables selected by the TPO, assessee has no objection in respect of 15 comparables. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that there is no need to exclude the above said company. iv. We have considered the submissions of the parties and perused the materials on record. As can be seen, the TPO at page 53 of his order has categorized the assessee as a pure software development service provider. The comments of the TPO in this regard are extracted hereunder for the sake of convenience: Software Product Company A company who develops a software product by following all the steps involved in creating software as explained above from Domain Analysis to Testing. In this case, intellectual property belongs to the company. The products are sold generally on license basis wherein the right to use the software is transferred without giving the source code. These types of companies are not similar to the taxpayer, who is a pure service provider. Pure Software Development Service Provider A pure software development service provider does a portion of the described software development life cycle. It does not generate any intellectual property for its own. The intellectual property generated belongs to the customer and not to the service provider. The taxpayer falls in this category ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NMM margin. 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken tor comparability purposes. The submission of the Id. counsel for the assessee was that If the above company should not be considered as comparable. The Id. DR, on the other hand relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the Id. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the Id. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. 13. In view of the aforesaid decision of the Tribunal, Kals Info Systems Ltd., and Accel Transmatics Ltd. are to be excluded for the purpose of comparison while determining the ALP of the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsider software development services segment alone for comparability analysis. IV, Infosys Technologies Ltd. i. Objecting to this company, the learned AR submitted that under no circumstances. This company can be considered as comparable, to a small captive service provider like assessee. It was submitted that Infosys is engaged in diversified activities including products, consultancy solutions. It commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further, due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. Finally, the learned AR submitted that the issue of comparability of Infosys to a captive service provider is no longer RES INTEGRA, due to following decisions of the different benches of the Tribunal: 1. Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011-Para 7.4) 2. Adaptee (India) Pvt. Ltd. Vs. DCIT (ITA No. 1801/Hyd/2009). 3. Patni Telecom Solutions Pvt. Ltd., Vs. ACIT (ITA No. 1846/Hyd/2012). 4. Trilogy E Business Services Software Ltd. Vs. DCIT (ITA No. 1054/Bang/2011 Para 20). 5. Agnity India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra), ITAT Bangalore Bench excluded this company relying upon the decision of ITAT, Mumbai Bench in case of Telcordia Technologies India Pvt. Ltd. (supra) pertaining to the same assessment year i.e. 2006-07. iv. Following the view expressed by Bangalore and Mumbai Benches, of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Tata Elxsi Ltd. is also to be excluded from the list of comparables while determining the, ALP of the international transaction. 5. The assessee has also objected to rejection of following comparables by the TPO: 1. VMF Softech Ltd. 2. TVS Infotech Ltd. 3. PSI Data Systems Ltd. (Seg.) 4. Larsen Toubro Infotech Ltd. 5. Birla Technologies Ltd. 6. Goldstone Technologies Ltd. 7. Quintegra Solutions Ltd. 6. So far as the VMF Softech Ltd. is concerned, the learned AR submitted that the TPO has rejected this company by applying the employee cost filter. However, it was submitted that the employee cost of the company is approximately 62% of the sales. In this connection, the learned AR referred to Schedule 12 13 from the annual report of the company. It was further submitted that as per the information pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , this company should be selected as comparable. 6.6 In respect of Quintegra Solutions Ltd., it is submitted that this comp-any was rejected by the TPO on the ground that it is predominantly on site company, however, as per the annual report of the company, the foreign exchange expenditure incurred is only 4.25% of the export turnover. Hence, there is no defect in selecting the aforesaid company as comparable. 7. The learned DR, on the other hand, submitted that the TPO having rejected the aforesaid companies after undertaking objective analysis, the assessee s contentions should not be entertained. 8. We have considered submissions of the parties in respect of the aforesaid companies. As can be seen, before the DRP though the assessee has advanced detailed submissions for inclusion of the aforesaid companies, but, the DRP has simply brushed aside the same without considering in proper perspective. Therefore, in our considered view assessee s contention in respect of these companies requires reconsideration. However, it is to be stated here that so far as L T Infotech Ltd. is concerned, this company is having a huge turnover of 790 crores and unlike the assessee it is n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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