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2015 (6) TMI 288 - ITAT HYDERABAD

2015 (6) TMI 288 - ITAT HYDERABAD - TMI - Transfer pricing adjustment - selection of comparables by TPO - Held that:- Bodhtree Consulting Ltd.is not being considered as a comparable company in the case of companies rendering software development services.

Comp-U-Learn Tech India Ltd. as relying on case of Kenexa Technologies P. Ltd., vs. DCIT [[2014 (11) TMI 587 - ITAT HYDERABAD] restore analysis of this company to the file of TPO who should look into the financial statements of the .....

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, 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.

Infosys Technologies Ltd. excluded from the list of comparable companies as it is functionally dis-similar and different from the assessee ince it owns significant intangible and has huge revenues from softwar .....

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a comparable as unctionally different from that of the assessee

Risk analysis - Held that:- Following the decision in the case of Kenexa Technologies P. Ltd., vs. DCIT, Hyderabad [2014 (11) TMI 587 - ITAT HYDERABAD] We remit the issue to the TPO to consider the risk profile of the assessee. We direct the TPO to allow necessary deductions for risk adjustment, after finalising the list of comparables as directed by us

Negative working capital - Held that:- There is no need f .....

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or The Rrevenue : Mr. D. Sudhakar Rao ORDER PER B. RAMAKOTAIAH, A.M. This appeal by assessee is against the order of A.O. under section 143(3) read with section 144C(1) of the Income Tax Act, 1961 consequent to the directions of the DRP, Hyderabad dated 27.11.2013. 2. Assessee has raised 11 grounds out of which ground Nos. 1 to 4, on various issues of T.P. documentation, use of multiple year data, use of additional filters, information obtained under section 133(6) are not pressed, therefore, gr .....

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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 o .....

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. Act. Assessee has turnover of ₹ 5.88 crores and its operating cost was at ₹ 5.21 crores. Assessee has raised various objections before the DRP on the proposed addition which were rejected by the DRP in its order. 5. Before us, Ld. Counsel submitted detailed arguments with reference to selection of various companies which are not comparable to the assessee s business operations. Ld. Counsel also made reference to Coordinate Bench decision in the case of Cisco Systems India P. Ltd., .....

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tted that if contention of negative working capital adjustments is accepted, the issue of risk analysis will become academic. In reply, learned D.R. relied on the detailed order of the TPO and DRP for inclusion of various companies which are objected to by the assessee. 6. We have considered the issue and examined the documents placed on record. There is no dispute with reference to the fact that assessee can be categorised as ITES company and its turnover is only ₹ 5.88 crores. The TPO af .....

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Global 20.80% 10. Thirdware Solutions 22.28% 11. Zylog Systems Ltd., 15.00% 12. Bodhtree Consulting Ltd., 68.43% 13. Comp-U-Learn Tech India Ltd., 28.00% 14. I Gate Global Solutions Ltd., 21.97% 15. Infosys Technologies Ltd., 41.34% 16. Kals Information Systems (Segmental) 23.11% 17. Tata Elxsi Ltd., (Segmental) 22.82% 7. Assessee has no objection for adoption of companies Sl.No. 1 to 11. Assessee has objection for the following six companies ( Sl No 12 to 17) and its objections and findings are .....

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ract 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 oper .....

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ed by the assessee. The assessee, however, submits before us that later on it came to the assessee s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the d .....

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Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed th .....

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e that this company is predominantly 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 .....

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re 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. 39. The assessee submitted before the DRP that Comp- U-Learn Tech India Ltd., was engaged in the development of new software (product development) (page 7 of the annual report) in information technology enabled services call center and business process outsourcing services ( .....

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evant details to substantiate its claim that Comp-ULearn Tech India Ltd., is not a comparable company. Respectfully following the Coordinate Bench decision cited (supra), we restore analysis of this company to the file of TPO who should look into the financial statements of the company and re-examine whether the company can be considered as a comparable company. Assessee should be given due opportunity to submit relevant details to substantiate its claim. With these directions, analysis of this .....

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s further submitted that learned TPO has not provided the copy of 133(6) response obtained. C. We have examined the contention of the assessee and noticed that this company has not been objected to by any other assessee s so far analysed by the ITAT in any of the orders so far issued for this assessment year. Ld. Counsel also could not bring anything on record that this company was rejected in any of the orders on the issue for this assessment year. As seen from the part of the balance sheet pla .....

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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 .....

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ices due to its goodwill, reputation and brand value and hence cannot be considered as comparable to risk mitigated contract service providers. Due to scale of operations, Infosys enjoys economies of scale in lower cost of infrastructural facilities and employees. It is further submitted that these companies are engaged in diversified activities including products, consultancy and solutions unlike Adaptec India. Infosys derives more than 49.30% of its revenue from onsite operations. In support o .....

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een considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- 11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TP .....

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earned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is 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 Autho .....

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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 generated several inventions and filed for many patents in India and USA ; (iv) the company has su .....

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rable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused an .....

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onally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. The decision rendered as aforesaid pertains to A.Y. 2008- 09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances i .....

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cted 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 t .....

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.1196/Hyd/2010 (v) Conexant Systems India P. Ltd., ITA.No.1429/Hyd/2010 and 1978/Hyd/2011. (vi) Bearing Point Business Consulting P. ltd., ITA.No.1124/Bang/2011 (vii) CSR India P. Ltd., ITA.No.1119/Bang/2011 (viii) First Advantage ITA.No.1086/Bang/2012. C. From the perusal of the above decisions of Coordinate Benches of the Tribunal, we find that this company (Kals Information Systems Ltd.,) has been analysed and rejected as a comparable. Bangalore bench of Tribunal in the case of Cisco Systems .....

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Systems Ltd. 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 repot, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the sa .....

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d to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the s .....

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PO 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 pr .....

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tating that the company s revenue from software development segment is 90.42% of the total turnover. B. Assessee s objections are that this company is functionally different. In the response to notice issued under section 133(6) of the Act for earlier year, this company has clearly stated that it cannot be considered as comparable to any other software services company, due to its complex nature of its business. This company has been analysed and rejected as a comparable by the Bangalore Tribuna .....

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al, we find that this company (Tata Elxsi Ltd.,) has been analysed and rejected as a comparable. Bangalore bench of Tribunal in the case of Cisco Systems (India) P. Ltd., ITA.No.271/Bang/2014 dated 14.08.2014 - A.Y. 2009-2010 has analysed as under : 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Ban .....

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e 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 servi .....

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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, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development servi .....

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order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three subsegments i) product design services; ii) engineering design services and i .....

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ifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same a .....

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onsidered 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 decisio .....

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s sought for risk adjustment due to difference in risk profile of the assessee and the comparable cases selected. We rely on the decision in the case of Excellence Data Research vs. ITO (ITA.No.159/Hyd/2014) for the A.Y. 2009-10 wherein it has been held as follows : 21. With reference to ground No.2.5 on risk profile, learned counsel for the assessee contended that the A.O./DRP have not considered the risk profile of the assessee and necessary adjustments have not been made in order to mitigate .....

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ending on its own business activity when compared to that of the comparable company, and in each case separate risk profile has to be analysed in FAR analysis. Therefore, allowing deduction of 1% towards risk profile uniformly cannot be adopted as a norm. Further, this aspect requires to be re-examined by the TPO. Therefore, after excluding the above companies, if any adjustment is required to be made, the A.O. is directed to consider the risk profile and allow necessary deduction, based on the .....

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.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, 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 c .....

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sidered 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 working capital requirement. We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP h .....

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