TMI Blog2015 (3) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd. Infosys Technologies Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. Standard deduction of 5% of the arm’s length price allowed to the Appellant by the CIT(A) - Held that:- If the difference between the arithmetic mean of the profit margins comparable companies ultimately retained and the profit margin of the Assessee is more than 5% than no deduction under the proviso to Sec.92C(2) of the Act could be allowed to an Assessee. Although 12 comparable which were rejected on the basis of RPT being more than zero percent, one comparable viz., Four Soft Ltd., will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd., and Infosys Technologies Ltd., will get excluded for the reason that the financial results are not reliable in the case of Sathyam Computers Ltd., and for the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation technology solutions to the business units of Textron Group. It is thus a routine contract software design and development service provider . 4. During the financial year 2004-05 relevant to the assessment year 2005- 06, the only international transaction that took place between the Assessee and Textron Group was provision of software development and support services to Novell US at a price of ₹ 12,20,32,357/-. 5. In support of the assessee s claim that the price charged by it for services rendered to its AE was at arms length, the assessee filed a report as required by the provisions of section 92E of the Act in Form 3EB together with detailed analysis. The assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP. Operating profits to cost was adopted as the Profit Level Indicator ( PLI ). The PLI of the assessee was arrived at as follows: Operating Revenue Rs.12,20,32,357 Operating Cost Rs.10,58,20,561 Operating Profit ₹ 1,62,11,796 Op.pr/cost% 15.32% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sen by the TPO as the final set of comparable companies, the CIT(A) excluded 12 companies for the reason that these companies had related party transaction. The CIT(A) applied the filter of related party transaction by holding that to be chosen as a comparable company, the comparable companies should not have any related party transaction. Therefore even if there is a single related party transaction, the said companies were excluded from the list of comparable companies. By doing so, the CIT(A) could retain only 5 out of the final 17 comparable companies chosen by the TPO, viz., Bodhtree Consulting Ltd., Lanco Global System Ltd., Sankhya Infotech Ltd., Exensys Software Solution Ltd., and Visual Soft Technology Ltd. In coming to the above conclusion, the CIT(A) followed the decisions of this Hon ble Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. vs DCIT (2007] 109 lTD 101 (Del). (ii) One company, Exensys Software Solutions Ltd., was excluded because it was in multiple activities including software products, software services and for the reasons that the company was showing super normal profits because of amalgamation of another company by name Holool India Private Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted party transactions. (3) The ld.CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company. (4) The learned CIT(A) erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s. Infosys Technologies Ltd., as a comparable. (5) The CIT(A) erred in holding that the Assessee is eligible for a standard deduction of 5% from the arm s length price under the proviso to Section 92C(2) of the Income-tax Act, 1961. 12. The grounds raised in the cross objection are as follows (Ground No.1 is general hence not reproduced):- (2) That the learned CIT(A) erred by not taking cognizance of the fact that the Respondent was engaged in Engineering Design Services. (3) That in making an adjustment to the Respondent s transfer price, on the facts and in the circumstances of the case, the learned CIT(A) erred in: (a) Arbitrarily rejecting filters applied by the Respondent while underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed the decision of this Hon ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore the grievance as projected by the Revenue in ground No.3 is misconceived. On the facts of the present case, we are of the view that the CIT(A) rightly excluded Exensys Software Solutions Ltd., Infosys Technologies Ltd., and Satyam Computers Ltd., from the list of comparable companies. 15. As regards ground No.4 raised by the revenue, the CIT(A) followed the decision of the ITAT Delhi in the case of Agnity India Technologies v. ITO (ITA 3856/DeI/2010) in coming to the conclusion that Infosys Technologies Ltd., is not comparable for the reason of its size, turnover and brand. The decision of the Tribunal in the case of Agnity India Technolgies (supra) has since been confirmed by the Hon ble Delhi High Court. Therefore the grievance projected by the Revenue in this regard is without any merit. 16. As regards the standard deduction of 5% of the arm s length price allowed to the Appellant by the CIT(A), which is challenged in ground No.5 by the Revenue before the Tribunal, it is not in dispute before us that in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information - SILICONTM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-toend solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: 2. Activities The company as engaged in the business of development of Software Products Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956. The Delhi Tribunal in ITO v. Colt Technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : 23. The other companies which are objected to by the assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO s Order, the said company has derived income from software licence also and AMCs. 26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 27. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R D expenditure for development of the products. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company s operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22. 22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Geometric Software Solutions Ltd., should be excluded from the list of comparables because of the RPT being more than 15%. The necessary data in support of such a claim has not been placed before us. The TPO in the chart annexed to this order has given the percentage of RPT in these two companies and it is nil RPT in the case of Bodhtree Consulting Ltd., and 11. 49% in the case of Geometric Software Solutions Ltd. Apart from the above, the Assessee has itself chosen Bodhtree Consulting Ltd., as a comparable company in its T.P. study. The Assessee objected to Geometric Software Solutions Ltd., being chosen as a comparable on the ground of functional dissimilarity which was found to be not correct by the TPO. In these circumstances, we are of the view that these two companies are not excluded from the list of comparables. 29. According to the learned counsel for the Assessee, if the submissions of the assessee are accepted, then the arithmetic mean of the comparables retained would be within the range of +/- 5% of the Assessee s Net Margin. Therefore, the other grounds raised in the memorandum of appeal are not pressed at this stage. He has however sought liberty to urge the said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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