TMI Blog2015 (1) TMI 604X X X X Extracts X X X X X X X X Extracts X X X X ..... re development services segment alone for comparability analysis. For Infosys Technologies Ltd.as accepted the fact that the assessee is purely a software development service provider to its AE whereas Infosys is not a captive service provider like assessee. It is a fact that Infosys is engaged in diversified activities and also engaged in development of products consultancy and solution. That apart, the size, reputation and brand value of Infosys, in no way makes it comparable to a small captive service provider like assessee therefore excluded. For Tata Elxsi Ltd. (Seg.)is also to be excluded from the list of comparables while determining the, ALP of the international transaction. For Flextronics Software Systems Ltd., (seg) it is functionally different and A.O. could not have taken this company as comparable company without making suitable adjustments for the differences. Therefore, this comparable has to be excluded. However, since, this aspect was not examined by any Coordinate Bench in A.Y. 2006-07, restore this to the file of TPO to examine the functions of the above company and determine whether that is comparable or not, keeping in mind the decision of Coordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in not excluding the foreign exchange gain of ₹ 10,36,754 from the total turnover for the purpose of computing the deduction u/s.10A of the Act. Similarly, communication expenses of ₹ 1,70,07,809 also, be deducted both total turnover and export turnover. 4.1. Assessee relied on the decision of ITO vs. Sak Soft Ltd., 313 ITR 353 of the Hon ble Special Bench of the Chennai Tribunal, wherein, the Tribunal discussed the above arithmetical calculation in detail and upheld the parity concept i.e., if anything is reduced from export turnover , the same also needs to be reduced from the total turnover for the purpose of computing the deduction u/s.10A of the Act. The ITAT, Hyderabad following the decision of Sak Soft Ltd., (supra), in the case of ITO vs. DE Block India Software (P) Ltd., in ITA.Nos. 983 984/H/2006 dt. 31.01.2007, ITO vs. Virtusa (India) Ltd., in ITA.No.757/Hyd/2006 dt.29.02.2008 and DCIT vs. Mentor Graphics (I) P. Ltd., in ITA.No.696/H/2009 dated 18th August, 2009 also upheld the said parity concept for computation of deduction u/s.10A of the Act. The assessee also relied on the following case laws before DRP : (i) Hon ble Gujarat High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. iGate Global Solutions Ltd., (seg.) 15.61% 19.17% 15.61% 5. Lanco Global Systems Ltd., 5.27% 10.40% 5.27% 6. Lucid Software Ltd., 8.92% 10.99% 8.92% 7. Media Soft Soilutions P. Ltd., 6.29% 9.68% 6.29% 8. Mindtree Ltd., (seg.) 14.67% 18.94% 14.67% 9. Persistent Systems P. Ltd., 24.67% 29.41% 24.67% 10. R Systems International (seg.) 22.20% 25.87% 22.20% 11. RS Software (India) Ltd., 15.69% 19.07% 15.69% 12. SIP Technologies and Exports Ltd., 3.06% 6.63% 3.06% 13. Sasken Communication Technologies Ltd., (seg.) 13.90% 18.77% 13.90% 14. Synfosys Business Solutions Ltd., 10.61% 12.88% 10.61% 15. Accel Transmatic Ltd., (seg.) 44.07% 16. Flextronics Software Systems Ltd., (seg.) 27.24% 17. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther submitted that the company has a negative operating margin of 18.73% for FY 2004-05. Further, the learned AR submitted that as per the annual report submitted by the company in response to 133(6) related party transaction (RPT) also fails threshold limit applied by the TPO himself. In this regard, the learned AR submitted the following computation: Particulars AE Rendering of services 56,274,970 Receiving of services 10,011,622 Interest paid 1,513,025 Lease payments 1,830,084 Total RPT 69,629,701 RPT/Sales 60.60% ii. It was therefore submitted that this company under no circumstances can be considered as a comparable to the assessee, which is a purely software development service provider. The learned AR submitted that ITAT, Bangalore Bench in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010 dated 30/04/2013 has held the aforesaid company not to be a comparable in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransmatic Ltd., has sold IP rights for the software developed by it. Further, it is also the contention of the assessee that this company fails the RPT filter of more than 25% applied by the TPO himself. In case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), the ITAT Bangalore Bench while examining the issue of comparability of the aforesaid company to a purely software development service provider has held as under: In so far Kals Info Systems Ltd., and Accel Transmatics Ltd., chosen by the TPO as comparables, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are functionally different. The following are the relevant observations of the Tribunal in this regard:- 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. c/T 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel lT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/8PO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development 4.3 On careful perusal of the business activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company clearly indicates that it is also engaged in selling of products, namely, XIUS suit of packaged products. It was submitted that since segmental financial results in respect of product and services are available in respect of this company, if at all this company is to be treated as comparable, the TPO may be directed to consider the profit margin of software development services segment alone which is 16.97%, In respect of such contention, the learned AR relied upon the following decisions: 1. Trilogy E Business Software India Pvt. Ltd. (ITA No. 1054/Bang/2011) 2. LG Soft India P. Ltd. (TS-64-ITAT-2013(Bang.-TP) 3. Bearing Point Business Consulting Pvt. Ltd. (ITA No. 1124/Bang/2011) 4. Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) 5. Transwhich India Pvt. Ltd. VS. DCIT (ITA No. 948/Bang/2011) 6. Mercedez Benz research development India Pvt. Ltd., (ITA. No. 1222/Bang/2011). 7. Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010) ii. The learned DR, on the other hand, submitted that the TPO having correctly considered the profit margin of the company by examining the annual report there is no need to modify the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas Infosys is not a captive service provider like assessee. It is a fact that Infosys is engaged in diversified activities and also engaged in development of products consultancy and solution. That apart, the size, reputation and brand value of Infosys, in no way makes it comparable to a small captive service provider like assessee. Therefore, following consistent view of different benches of Tribunal, we exclude this company from the list of comparables. V. Tata Elxsi Ltd. (Seg.) i. Objecting to the aforesaid company being treated as comparable, the learned AR submitted that the said company shall be rejected as comparable since it is a specialized embedded software development company. Further, he submitted that as per the information obtained from the said company u/s 133(6) of the Act, it was stated that due to the complex segments in which they are operating, it is not comparable to any other software services company. The AR relied on the following precedents in support of his submissions: 1. Conexant Systems India Pt. Ltd., (ITA No. 1429/Hyd/2010 and 1978/Hyd/2011) 2 Telcordia Technologies India P. Ld., (ITA No. 7821/Mum/2011) 3. Logica Pvt. Ltd. (IT(TP)A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults 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. Therefore, we direct the A.O./TPO to exclude these three companies from the list of comparables. 9. Likewise, in A.Y. 2007-08 also the Coordinate Bench has considered this comparable company and stated that Flextronics Software is functionally different and A.O. could not have taken this company as comparable company without making suitable adjustments for the differences. Therefore, this comparable has to be excluded. However, since, this aspect was not examined by any Coordinate Bench in A.Y. 2006-07 and no order of Coordinate Bench was brought to our notice relevant to this year. We, in the interest of justice, restore this to the file of TPO to examine the functions of the above company and determine whether that is comparable or not, keeping in mind the decision of Coordinate Bench of earlier A.Y. and later A.Y. about the functional differences. The issue is restored to the file of TPO. 10. Coming to the claim of assessee to include companies, as stated in Ground 6.4.5(b), we are of the opinion that TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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