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2015 (4) TMI 919 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that:- Infosys Technologies 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. Thus we hold that Infosys Ltd. be excluded from the list of comparable companies. KALS Information Systems Ltd. company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company. Tata Elxsi Ltd. company is concerned, it is not in dispute before us that in assessee’s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment. Comp-U Learn Global Tech India Ltd. the company has nil onsite revenue and satisfied all the filters applied by the TPO. We are of the opinion that some more analysis has to be done and we direct the TPO to look into the financial statement of the company and also provide an opportunity to the assessee to submit relevant details to substantiate its claim that Comp-U-Learn Tech India Ltd. is not a comparable company Persistent Systems Pvt. Ltd.is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Thus in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. R Systems International ltd. Unless the financial year-end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in case of Sandstone Advisors (P) Ltd. Vs. ACIT, [2013 (9) TMI 401 - ITAT MUMBAI], the Tribunal after considering the prescription of Rule 10B(4) has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. Thus this case should be excluded from the list of comparables Think Soft Global Services Ltd. cannot be treated as comparable to assessee as software testing services cannot be equated with software development services. Thirdware Solutions excluded from the list of comparables the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. I-Gate Global Solutions Ltd. be excluded on the basis of high turnover. Zylog Systems Ltd. excluded from the list of comparables as from the extracts of the annual report, it is seen that there is substantial increase in revenue in the impugned AY compared to the preceding AY. Therefore, considering the fact that the acquisitions made by the company during the relevant FY could have impacted the revenue earning and profitability of the company, it will not be safe to treat the aforesaid company as a comparable. Sasken Communication Technologies Ltd the entire annual report has not been placed before us, we are not in a position to give a conclusive finding in this regard. We, therefore, remit the issue relating to comparability of this company for fresh adjudication by the AO/TPO. Treating the deferred revenue expenditure as operating cost by TPO/DRP/AO - Held that:- We agree with the submissions of the ld. AR that every expenditure debited to the P&L account cannot be considered as operational in nature. From the observations made by TPO, it appears, he has rejected assessee’s claim only for the reason that no such entries were found in the annual report. The TPO has not properly examined the nature of expenditure. However, at the same time, assessee has to demonstrate that such expenditure was not claimed in any preceding assessment years. Therefore, considering the facts of the case, we are inclined to remit this issue back to the file of AO/TPO for deciding the issue afresh. Non-exclusion of a reasonable amount of employee cost from the operating cost while calculating the operating margin - Held that:- The matter requires re-examination by AO/TPO after verifying the cause for quantum jump of salary in the impugned AY. If it is found that part of the employee cost is non-operational, then, suitable adjustment may be given from the operating cost. Risk adjustment and negative working capital adjustment - Held that:- neither in its TP study nor before the TPO and DRP, assessee has submitted any computation made on a scientific basis towards risk adjustment. Though benefit of risk adjustment can be given in an appropriate case, but, it has to be on the basis of facts and evidence and cannot be granted in a routine manner. Though, it may be true, in case of a captive service provider AE takes all major risks. But, at the same time assessee also bears single customer risk, as in the event of any loss or damage to the business of AE assessee is also likely to suffer. Moreover, assessee has to demonstrate risk assumed by each of the comparable companies vis-à-vis the assessee. The basis for adjustment towards risk must come from assessee’s side. As assessee has not properly established its case either before the TPO or DRP by bringing facts and materials on record, we are inclined to remit this issue back to the file of AO/TPO for deciding afresh .
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