TMI Blog2015 (5) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Exclusion of certain companies from the list of comparables in the ‘Marketing support services’ segment - Held that:- Choksi Laboratories Ltd.is basically engaged in providing testing services for various products and also offers services in the field of pollution control. As against this, the services provided by the assessee are purely in the nature of identifying customers for its AEs and providing technical support services to their customers. We fail to appreciate as to how marketing support services can be equated with testing services. When we peruse Schedule of fixed assets of this company, it can be seen that the major asset is ‘Instruments.’ It is with the help of these instruments that the company is providing services in the nature of testing of various products. By no standard, this company can be considered as comparable with the assessee. WAPCOS Ltd. (Seg.) is not comparable as this company has maintained accounts on entity level and there is no bifurcation available in respect of the services similar to those provided by the assessee under this segment, this company on entity level cannot be considered as comparable. Recruitment and training expenses - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned the assessee s segmental results. As regards the segment of `Software development services , the assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit level indicator (PLI) of Operating Profit/Total Cost (OP/TC). Profit margin in the software development service segment was declared by the assessee at 19.16%. In order to demonstrate that these services were provided at arm s length price, the assessee chose 20 companies as comparable. The TPO rejected the assessee s computation of arm s length price worked out on the basis of multiple year data of the comparables and proceeded to determine the ALP of such transactions by relying on the current year s data alone. He rejected 14 out of 20 companies chosen by the assessee as comparables and added new 13 companies to the list of comparables, with the final tally of 19 comparable companies giving their profit ratio as under:- Sl.No. Name of the Company Sales (Rs. Cr.) OP to Total Cost 1. Avani Cincom Technologies 3 21.65 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies, namely, Kals Information Systems Ltd., and Softsol India Ltd. With the revised list of 18 companies, the ld. CIT(A) computed average of the OP/TC of these companies at 20.48%. Since the PLI of the assessee was at 19.15%, being within the permissible range, he ordered for the deletion of addition of ₹ 5.25 crore and odd. 6. We have heard the rival submissions and perused the relevant material on record. It can be seen from the orders of the authorities below that neither the application of TNMM as the most appropriate method nor the PLI has been disputed for determination of the ALP in the `Software development services segment. Even though the ld. CIT(A) has ordered for the deletion of addition on account of TP adjustment in respect of this international transaction, the assessee is still aggrieved against the inclusion of the following three companies in the list of comparables :- i) Infosys Technologies Ltd.; ii) Persistent Systems Ltd.; and iii) Wipro Ltd. 7. But for the inclusion of the above three companies in the final list of comparables, the assessee is satisfied with all the findings given by the TPO, as endorsed in the first appeal, in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d enterprise (AE) with aggregate of direct and indirect costs incurred by it in performing the services to Ciena, USA plus suitable mark-up to be decided on agreed basis from time to time. For the year under consideration, the assessee was compensated with a mark- up of 19%. As per this Agreement, there is a Confidentiality clause by which all information communicated to one party by the other can be used only for the purposes of this Agreement. Clause (9) of the Agreement is captioned as Intangible Property Rights. This clause provides that the assessee, at no time, shall acquire or retain any right, title or interest whatsoever in the work done by it. This clause further provides that the intellectual property rights in the format, presentation, procedures, process, computer software and other material of whatever nature created, developed or enhanced by Ciena India in the course of providing the services to Ciena, USA shall be and remain the sole property of Ciena, USA absolutely. From the above clauses of the Agreement, it is manifest that the assessee is simply a captive unit providing software development services to its AEs without acquiring or retaining any intellectual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R D at its own etc. When we consider the cumulative effect of all the above factors, we find that by no standard, the assessee can be compared with Infosys Technologies Ltd. Respectfully following the judgment of the Hon ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd. to be incomparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables. Persistent Systems Ltd. 9.1. The TPO observed this company to be engaged in software development services with predominant revenues from software development services. He called for some information u/s 133(6) of the Act from this company regarding break up of software products and software development services. On consideration of such information, he observed that around 95.1% of the total revenue of this company was from software development services and the remaining amount was from software produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables. Wipro Ltd. (Seg.) 10.1. The assessee rejected this company in its TP document by treating it as functionally different. The TPO observed that the IT services segment of this company on standalone basis was comparable with the assessee company. He sought some information from this company u/s 133(6) of the Act and, thereafter, came to the conclusion that its IT services segment was comparable with the assessee. In doing so, he rejected the assessee s contention about branding and turnover, which was also taken by the assessee against the inclusion of Infosys Technologies Ltd. The ld. CIT(A) upheld the finding of the AO/TPO in treating it as a correct comparable. The assessee is aggrieved. 10.2. We have heard the rival submissions the perused the relevant material on record. It can be observed from the TPO s order itself that the facts and circumstances of Wipro Ltd., are somewhat similar to Infosys Technologies Ltd., inasmuch as he has proceeded to reject the assessee s objections by relying on the reasoning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port services segment. Briefly stated, the facts of this ground are that the assessee reported international transaction of Provision of marketing support services with the transacted value of ₹ 4,21,25,941/-. The assessee employed TNMM as the most appropriate method with the PLI of Operating profit to Total cost (OP/TC). The assessee s profit margin under this segment was declared at 13.58%. The assessee chose 11 companies as comparables whose average profit margin was within the permissible range of the assessee s profit margin under this segment. For the reasons given in his order, the TPO completely rejected the assessee s list of comparables and chose 10 new companies as comparable. The average operating profit margin of these companies was computed at 22.5% and, accordingly, transfer pricing adjustment of ₹ 33,13,077/- was proposed by the TPO, which was eventually made by the AO. The ld. CIT(A) excluded Apitco Ltd., Rites Ltd., and Vapi Waste and Affluent Management Company Ltd. from the final list of comparables drawn by the TPO. This resulted into the deletion of addition on account of transfer pricing adjustment under this segment. Both the sides are in appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee under this segment, we now proceed to examine whether or not the companies under challenge are comparable. Choksi Laboratories Ltd. 15. The TPO visited the website of this company and noticed that it was engaged in providing analysis, calibrations, pollution control and consultancy services to a broad spectrum of industries. By considering such nature of services provided by this company, the TPO held that these were similar to the services provided by the assessee to its AE. We have gone through the Annual report of this company, which is available on pages 2370 onwards of the paper book. Note no. 8 to Part B - Notes forming part of the accounts - provides that this company is a commercial testing house engaged in testing of various products and also offers services in the field of pollution control as allied activity. Para 2 of the Annexure to the auditor s report also clarifies that this is a company engaged in rendering services for testing purposes. From the above description of the nature of services carried on by this company, it is evident that it is basically engaged in providing testing services for various products and also offers services in the fie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exclusion by the ld. CIT(A) of Apitco Ltd. This company was considered as comparable by the TPO. The ld. CIT(A) noticed that this company to be engaged in providing technical and engineering services and also executing projects on turnover basis. He, therefore, held this company to be not comparable. 17.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is engaged in providing several services, viz., Micro Enterprises Development, Skill Development, Entrepreneurship Development, Research Studies, Project related Services, Infrastructure Planning Development, Environment Management, Energy related Services, Cluster Development, Technology Facilitation, Asset Reconstruction Management Services, Emerging Areas. It can be seen from the nature of operations carried out by this company that the same is towards Micro enterprises development, Skill development and Project related services, etc., also including Infrastructure planning and development along with Energy related service and Cluster development. A part of its activities has got some resemblance with the nature of service provided b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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