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TMI Blog2015 (6) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... ve working capital adjustment. Ground No.9 is legal issue with reference to application of proviso to section 92C(2). Ground No.10 pertains to interest under section 234B which is mandatory and consequential in nature and no adjudication is required. Ground No.11 pertains to initiation of penalty proceedings which is premature in nature. 3. We have heard the Ld. Counsel and learned D.R. Ld. Counsel fairly admitted that if ground Nos. 5, 7 and 8 are decided other grounds need not be considered. 4. Briefly stated, assessee company is engaged in the business of software, design and development and testing in the field of storage solutions. It filed its return of income declaring income of Rs. 89,51,330. Since assessee is functioning as ITES provider to it's A.E. on cost + 10% margin basis, its international transactions are referred to the TPO and after adopting various filters and analysing the data available in the domain, selected 17 companies as comparable companies, thereby arriving at an arithmetic mean of 25.26% and proposed a sum of Rs. 63,53,365 as an adjustment under section 92C(3) of the I.T. Act. Assessee has turnover of Rs. 5.88 crores and its operating cost was at Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing six companies ( Sl No 12 to 17) and its objections and findings are as under : 1. Bodhtree Consulting Ltd., A. TPO selected this company stating that there is nothing available in the annual report to show any peculiar economic circumstance in the company due to which there is a high margin. TPO further considered that in comparability analysis loss or so-called higher margin is not a determining factor unless there are any peculiar economic circumstances. B. Assessee's objections are that Bodhtree Consulting Ltd., is functionally different. From the 133(6) extract provided in the T.P. order itself, it is evident that the company is into a wide array of business activities including off-shoring data management, open and end to end web solutions, data warehousing which do not fall into any vertical of software services. It is pertinent to note that the company had provided segmental information for A.Y. 2006-07. The abnormal variation in margin of the company of 68.63% vis-à-vis 19.14% for the previous year clearly evidences the exceptional operations. C. In support of its contention, assessee relied on the order of ITAT Bangalore Tribunal in the case of Cisco Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ominantly into software development activities. The income from software development of this company worked out to 95% of total revenue. B. Assessee's objections are that this company is functionally different. As per page 5 of the annual report of this company it is engaged in providing IT enabled services, call center and BPO services. The company earns revenue from licenses, software products, courseware materials. It is further pointed by assessee that the learned TPO has not provided the copy of 133(6) response obtained. C. This company as comparable was considered in Coordinate Bench decision in the case of Kenexa Technologies P. Ltd., vs. DCIT, Hyderabad (2015) 37 ITR (Trib) 306 (Hyd.) wherein the Tribunal has held as under : "38. With respect to Comp-U-Learn Tech India Ltd., the assessee submitted that this company is functionally dissimilar and diversified in services. Further it was submitted by learned counsel that the software development expenditure is only 25% of the total expenditure. It was submitted that the TPO relied on the information obtained from the company under section 133(6) notice and held it to be predominantly engaged in software development services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. Even though the company itself classified that ITES company, being similar to assessee company, assessee's objection is that the information obtained by the TPO was not provided to the assessee. In view of this, we, in the interest of justice restore the matter to the file of the A.O. to examine afresh. The segmental information pertaining to ITES obtained by the TPO should be provided to the assessee for its objections and then re-consider the issue whether the same is comparable or not. With these directions, the issue is restored to the file of TPO for fresh examination, by giving due opportunity to the assessee. 4. Infosys Technologies Ltd., A. TPO selected this company stating that assessee itself considered this company as comparable in the T.P. study. The assessee has not furnished any economic rationale to say higher turnover companies or companies with brand value have earned better margins than low turnover companies. For example, ST Micro Electronics; and Symantee Software Solutons P. Ltd., The TPO further pointed out that Infosys itself is not sure of the computation of brand value and wants to use these only to initiate academic discussions. Further brand may bri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respectfully following the coordinate bench decision, we hold that this company cannot be regarded as a comparable. AO is directed to exclude the same. 5. Kals Information Systems (Segmental) A. TPO selected this company stating that this company in its response to 133(6) notice clearly stated that their business may be classified as a pure software development service provider. In many cases, the company uses its own library of products and prepares customized software. B. Assessee's objections are that this company is engaged in development of software and software products and no break-up of revenue is provided. Further, the company has inventory of -34% of revenue, clearly evidencing that the company has significant revenue from products (i.e., in excess of 25%). This company is functionally different as it is engaged in two segments (i) development of software and software products (ii) training services. In support of its contention, the Ld. Counsel relied on the following decisions : (i) Cisco Systems (India) P. Ltd., ITA.No.271/Bang/2014 (ii) Bindview India P. Ltd., ITA.No.1386/PN/2010 (iii) Virtusa (India) P. Ltd., ITA.1962/HNyd/2011 (iv) Intoto Software India P. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable." Respectfully following the coordinate bench decision, we hold that this company cannot be regarded as a comparable. AO is directed to exclude the same. 8. Ground No.7 pertain to risk analysis. Even though it was submitted that this ground becomes academic, we are of the opinion that the finding is required on this ground. In the case of Kenexa T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : "14. Ground No.11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as : * The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. * The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the work ..... X X X X Extracts X X X X X X X X Extracts X X X X
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