TMI Blog2015 (5) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software 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., 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. - Decided against revenue. Exclusion of comparable companies with RPT of less than zero percent is not valid, and that companies where RPT is less than 15% alone can be considered, then the comparable rejected by the CIT(A) on the basis of the said filter will have to be included along with the four comparable retained by the CIT(A). 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., will get excluded for the reason that the financial results are not reliable. The remaining 10 comparable compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets - Decided in favour of assessee for statistical purposes. Exclusion of telecommunication expenses and travel expenses both from total turnover as well as export turnover while computing deduction u/s.10A - Held that:- As in Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) held that while computing the deduction under section 10A of the Act, if the export turnover in the numerator is to be arrived at after excluding certain expenditure, then the same expenditure should also be excluded from the total turnover also. Respectfully following the same, we dismiss this ground of revenue and of the view that the CIT(A) has rightly directed the AO to exclude telecommunication charges and travel expenses incurred be excluded both from export turnover and total turnover - Decided against revenue. - IT(TP)A No.391/Bang/2012 - - - Dated:- 27-3-2015 - Shri N.V. Vasudevan And Shri Jason P. Boaz JJ. For the Appellant : Dr. P.K. Srihari, Addl. CIT (DR) For the Respondent : Shri Eric Mehta Smt. Shilpa S., CAs ORDER Per N.V. Vasudevan, Judicial Member IT(TP)A No.391/Bang/2012 is an appeal by the Revenue and IT(TP)A No.296/Bang/2012 is an appeal by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as adopted as the Profit Level Indicator ( PLI ). The PLI of the assessee was arrived at as follows: Operating Revenue Rs.21,61,03,704 Operating Cost Rs.19,48,13,252 Operating Profit ₹ 2,12,90,452 Op.pr/cost% 10.93% 6. The Transfer Pricing Officer (TPO) arrived at a final set of 17 comparable companies. The set of 17 comparable companies is given as Annexure-I to this order. 7. The assessee raised various objections to the methodology adopted and the reasons assigned by the TPO for rejecting the comparable chosen by the assessee in its TP study. The TPO finally passed an order u/s. 92CA of the Act and on the basis of the profit margins of comparable companies set out in Annexure-I to this order, arrived at arithmetic mean of 23.45% after working capital adjustment and 26.59% before working capital adjustment. The computation of the ALP by the TPO in this regard was as follows:- Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because of amalgamation of another company by name Holool India Private Limited and such amalgamation had a material/significant impact on the results of Exensys for the financial year ending 31.3.2005. (iii) Satyam Computer Services Ltd., and Infosys Technologies Ltd., get excluded by applying the related party transaction filter. Nevertheless, the CIT(A) held that Satyam Computer Services Ltd., has to be excluded from comparable companies for non-reliability of financial data. In doing so, the CIT(A) followed 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]. Likewise lnfosys Technologies selected by the TPO, was rejected as a comparable based on high turnover and high risk. In doing so, the CIT(A) followed the decision of this Hon ble Tribunal in Agnity India Technologies v. ITO and Genisys Integrated Systems (India) Pvt Ltd v. ITO (supra). The CIT(A) also held that the Assessee would be entitled to 5% standard deduction under the proviso to Sec.92CA(2) of the Act. 9. After giving effect to the findings given above, still there would be a very negligible addition that will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this Tribunal, in the cases of 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), and Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) and various other cases has taken a view that comparables having RPT of upto 15% of total revenues can be considered. In view thereof, the Revenue s grievance on this issue as projected in the relevant ground has to be allowed. It is held that the CIT(A) ought to have adopted a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently it is held that comparable companies having RPT upto 15% of the total revenues alone can be included. 14. The Ground raised by the Revenue with regard to the action of the CIT(A) in excluding companies with abnormal profits is misconceived and the issue and does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aragraphs. 17. The learned counsel for the Assessee also seeks exclusion of one comparable chosen by the TPO as a comparable viz., Sankhya lnfotech Limited. Sankhya Infotech Limited ( Sankhya ) 18. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below:- (1) SILICONTM Training 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were :- 15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, 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. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. 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. Under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005-2006 order dated 12.2.2014. 25. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: 15.7. TATA ELXSI LIMITED : The objection of the assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and assessee s objection 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 so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. 26. Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services Pvt.Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee. 27. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies. 28. In the chart filed before us the learned counsel for the Assessee has submitted that Bodhtree Consulting Ltd., should be excluded from the list of comparables because of the RPT being more than 15%. Infosys Technologies Ltd., should be excluded as it has diversified operations and engaged in development of niche products, owns brands, intangibles and has huge scale of operations etc., In this regard, the learned counsel for the Assessee relied on the following observations of the Hyderabad ITAT Bench in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly similar. Hence, the assessee's contention to exclude companies as comparables would be totally irrelevant. The learned AR in his rejoinder submitted that though the assessee had selected Infosys Technologies Ltd. as a comparable but it is not estopped from objecting to the company being selected as a comparable if it has been mistakenly considered as a comparable by the assessee. In support of such contention, the learned AR relied upon the decision of the ITAT Special Bench in the case of Quark Systems (38 SOT 207). We have heard submissions of the parties and perused the materials on record. So far as Infosys Technologies Ltd. is concerned the issue of comparability of the aforesaid company has been considered by different Benches of the Tribunal including the Hyderabad Benches. It is to be noted that the consistent view of different Benches of the Tribunal is to the effect that Infosys Technologies Ltd. being a big company in all respects including the range of turnover is not a comparable to small companies which are captive service providers having considerably low turnover. In fact, the Hon ble Delhi Court in a judgement dated 19.7.2013 in the case of Agnity Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital adjustment, the TPO did not take into account the advance received by the Assessee from its Associated Enterprise on the ground that these advances were utilized for acquiring fixed assets. The Assessee pointed out before DRP that the advances were provided to the Assessee by the AE to meet its current working capital as well as the future requirements. Accordingly, the Assessee, being a service provider utilizes these funds for carrying out its day to day operations and also to set off against the provision of services (current or future). The Assessee also submitted that the AE can make advance payments to assist the Assessee in its cash flows. Any advance payment made shall be taken into consideration when settling the final fees. It was also pointed out that the fixed assets were acquired out of the business operations and not out of the advances given by the AE. The TPO as well as the DRP did not consider this claim by examining the details furnished by the Assessee but held that the advances received from the AE were utilized for acquiring fixed assets. 33. Before us, the learned counsel for the Assessee reiterated submissions made before DRP. The learned counsel ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act telecommunication expenses and travel expenses on the ground that these expenses are attributable to delivery of software outside India and expenses incurred on rendering technical services outside India. It is the plea of the Assessee that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services and that telecommunication expenses were incurred not in connection with delivery of computer software outside India. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the Hon ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn). The alternate claim was accepted by the CIT(A) against which the revenue has raised ground No.2 3 before the Tribunal. 37. We have heard the ld. counsel for the assessee and the ld. DR on the issues raised in this regard. Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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