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2014 (2) TMI 560 - AT - Income TaxDetermination of Arms Length Price – International Transactions undertaken – Selection of Comparables – Held that:- The decision in Intoto Software India (P.) Ltd. Versus Assistant Commissioner of Income-tax, Circle -2(1), Hyderabad [2013 (10) TMI 599 - ITAT HYDERABAD] followed - The assessee is a captive service provider to the group companies and is providing services on cost plus mark- up basis – TPO in his order has brought out the differences between a product company and a software development services provider - he is aware of the functional dissimilarity between a product company and a software development service provider - the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available - The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products – u/s 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies - the Assessing Officer/TPO has exercised this power to call for details with regard to the various companies - The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable - Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee-company to bring them on par with the assessee, these companies are to be excluded from the list of comparables – thus, the AO/TPO directed to exclude the comparables as ordered – Decided in favour of Assessee. Risk adjustment relief – Held that:- The TPO has accepted that assessee has a risk free entity and risk adjustment is required - However, as against 7.6% quantified by the assessee, the A.O. arrived at risk adjustment of 0.85% - Even this was not granted to the assessee – thus, the TPO is directed to re-examine the issue and grant risk adjustment after analysing the risk prevailed to the assessee company vis-a-vis the other companies – Decided in favour of Assessee.
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