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2015 (6) TMI 717 - ITAT BANGALORE

2015 (6) TMI 717 - ITAT BANGALORE - TMI - Transfer pricing adjustment - selection of comparable - Held that:- Celestial Biolabs Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd., Wipro Ltd., Kals Information Systems Ltd., Persistent Systems Ltd., Avani Cimcon Technologies Ltd., Thirdware Solutions Ltd., Lucid Software Ltd., Quintegra Solutions Ltd., E-Zest Solutions Ltd. and Softsol India Ltd. are to be excluded from the list of final comparables as to be functionally dissimilar with that of asse .....

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e Act' for short] passed in consonance with the directions of the Dispute Resolution Panel (DRP). 2. Brief facts of the case are that the assessee-company, which is engaged in the business of software development and application services provider, has filed its return of income for the assessment year 2008-09 declaring nil income after claiming deduction u/s 10A of the Act. The assessee had entered into international transaction with its Associated Enterprise (AE) during the relevant assessm .....

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reto, the AO passed the final assessment order against which the assessee is in appeal before us. 3. At the time of hearing, the learned counsel for the assessee filed a chart showing the various comparable companies which are to be excluded for the reasons given therein. It is stated by the learned counsel for the assessee that there is no dispute with regard to the adoption of the TNMM as the most appropriate method for determination of the ALP but the only challenge is to the comparable compa .....

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dopted 20 companies as comparables out of which the assessee is challenging 12 companies on the ground of functional dissimilarity. He submitted that all these companies were also considered by the TPO as comparable companies in the case of 3DPLM Software Solutions vs. DCIT (IT(TP)A No.1303/Bang/2012 dated 28/11/2013) for the very same assessment year 2008-09 and this Tribunal, after considering the issue at length has held these companies to be functionally dissimilar from the 3DPLM Software So .....

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labs Ltd. ii) Infosys Technologies Ltd. iii) Tata Elxsi Ltd. iv) Wipro Ltd. v) Kals Information Systems Ltd. vi) Persistent Systems Ltd. vii) Avani Cimcon Technologies Ltd. viii) Thirdware Solutions Ltd. ix) Lucid Software Ltd. x) Quintegra Solutions Ltd. xi) E-Zest Solutions Ltd. xii) Softsol India Ltd. All these comparables challenged by the assessee were also taken as comparables in the case of 3DPLM Software Solutions Ltd., and this Tribunal has held these companies to be functionally dissim .....

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h has been considered for ALP adjustment is software support or development services. In the case of 3DPLM also, the international transaction considered for ALP adjustment is in respect of software development services and the relevant assessment year is 2008- 09. Therefore, in our opinion, the decision of the Tribunal in the case of 3DPLM Software Solutions Ltd., is applicable to the case before us. Therefore the relevant paragraphs of the above referred decision are reproduced hereunder for r .....

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he reasoning given in the TPO s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assesse .....

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his Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/20 .....

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comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally 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 .....

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services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- …. Tata Elxsi is engaged in development of niche product and devel .....

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able to treat this company as fit for comparability analysis for determining the arm s length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on han .....

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any as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several p .....

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nal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. v) KALS Information Systems Ltd. 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of th .....

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ve held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribun .....

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on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be t .....

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) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Repre .....

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he assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of t .....

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n product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for so .....

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at the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, coordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi .....

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er year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. x) Quintegra Solutions: 18.3.1 We have heard the rival submissions and perused and carefully considered the material .....

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s company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted from the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made b .....

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engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. xi) E-Zest Solutions Ltd.: 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that t .....

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