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2015 (6) TMI 801 - ITAT HYDERABAD

2015 (6) TMI 801 - ITAT HYDERABAD - TMI - Transfer pricing adjustment - adjustment of armís length price - selection of comparable - Held that:- Infosys Technologies Ltd.,Wipro Ltd. (Seg.), KALS Information Systems Ltd., (Seg.), Tata Elxsi Ltd., (Seg.), Avani Cimcon Technologies Ltd. and E-Zest Solutions Ltd. are to be excluded from the final list of comparable as functionally dissimilar and different from the software activity of assessee as relying on case of M/s. Invensys Development Centre I .....

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ting deduction under section 10A - Held that:- Following the decision of ITO vs. Saksoft [2009 (3) TMI 243 - ITAT MADRAS-D], DRP should have given a direction to exclude communication charges from the total turnover as well. Since the issue is held in favour of assessee in the case of ITO vs. Sak Soft Limited [supra] and also as approved by Honíble Bombay High Court in the case of CIT vs. Gemplus Jewellery Ltd., [2010 (6) TMI 65 - BOMBAY HIGH COURT ], we direct the AO to exclude the communicatio .....

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Tax Act, 1961 dated 27.09.2012 and consequential assessment order dated 30.11.2012 passed by A.O. under section 143(3) read with section 144C(5) of the I.T. Act, 1961 relating to A.Y. 2008- 09. 2. Briefly the facts are, assessee company is a private limited company registered under Companies Act, 1956. Assessee company is a wholly owned subsidiary of Convergys Information management Group Inc., USA. The assessee company has been registered as a 100% export oriented unit under the software techno .....

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declaring the total income of ₹ 41,412 after claiming deduction under section 10A of ₹ 27,74,72,754 under normal provisions. The assessee company paid tax on book profit of ₹ 22,72,37,501 under section 115JB of the I.T. Act, 1961. A reference under section 92CA was made to the Addl. Commissioner of Income Tax, Transfer Pricing, Hyderabad by the Addl. CIT, Range-1, Circle 1(2), Hyderabad to determine the ALP of the international transactions of the assessee reported in Form 3CE .....

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sessee from the export turnover without corresponding reduction from the total turnover in the computation of deduction under section 10A of the Act. 3. Disallowed depreciation amounting to ₹ 23,05,092 on software, treating them as intangible assets quantifying for depreciation at the rate of 25% instead of the depreciation rate of 60% claimed by the assessee as applicable to softwares. 4. Added an amount of ₹ 223,902 to the income of the assessee as unexplained expenditure under sec .....

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xcluding one of the comparables selected by the TPO i.e. M/s Celestial Labs limited which was directed to be excluded by the DRP. 3. Being aggrieved of the order passed by the DRP assessee is before us raising nine grounds out of which, ground Nos. 1 is general in nature and therefore, it need not be adjudicated. Ground Nos. 4, 5, 6, 7 and 8 are not pressed and accordingly they are dismissed as not pressed. Ground Nos.2 and 3 reads as under : 2. That the learned A.O./learned TPO erred in includi .....

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r excluding one comparable as directed by DRP) and making addition. Finally there are 18 companies which are held as comparable companies and Assessee s objections are with reference to the following six companies : 1. Infosys Technologies Ltd., 2. Wipro Ltd. (Seg.) 3. KALS Information Systems Ltd., (Seg.) 4. Tata Elxsi Ltd., (Seg.) 5. Avani Cimcon Technologies Ltd., 6. E-Zest Solutions Ltd., 4.1. It was submitted that assessee s objections are already considered similarly in the Coordinate Benc .....

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, vs. ACIT, Circle 2(1), Hyderabad (supra), We have no hesitation in directing the A.O. to exclude the six companies as the issues are already decided similarly in Invensys Development Centre India (P) Ltd., (supra). For the sake of record, the consideration and decisions in that order are extracted as under : 1.AVANI CIMCON TECHNOLOGIES LIMITED : 4.1.1 This company was selected by the TPO as a comparable. Assessee objects to the inclusion of this company as a comparable on the ground that this .....

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the Act for collecting information about the company directly. 4.1.2 Before us, the learned Authorised Representative reiterated assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. In support o .....

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inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 4.1.4 We have heard both parties and perused and carefully, considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an .....

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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 assessee, following the decisions of the co-ordinate benches of this Tribunal in assessee's own case for Assessment Year 2007-08 in ITA No.1780/hyd/2011, and the findings in the above cited cases wherein this company was excluded, we direct the A.O./TPO to exclude this company from the list of comparables. 2. E-ZEST SOLU .....

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uthorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to assessee. It is submitted by the learned Authorised Representative that this company is engaged in e- Business Consulting Services , consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services and enterprise solutions. It is further submitted that this company .....

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t services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decisions of the coordinate Benches of the Tribunal in the cases of (i) Agnity India Technologies P. Ltd., vs. DCIT, Circle 1(1), New Delhi ITA.No.6485/Del/2012 dated 20th September, 2013 and (ii) 3DPLM Software Solution Ltd., (Successor to Delmia Solutions P. Ltd.,) Bangalore vs. DCIT, Circle 11(1), Bangalore I.T.(T.P.)A.No.1303/ Bang / 2012 date .....

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nt made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by assessee. From the details on record, we find that while assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical s .....

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Solution Ltd., (Successor to Delmia Solutions P. Ltd.,) Bangalore vs. DCIT, Circle 11(1), Bangalore I.T.(T.P.)A.No.1303/ Bang / 2012 dated 28.11.2013, we hold that this company, i.e. e-Zest Solutions Ltd. be excluded from the set of comparables. 3. INFOSYS TECHNOLOGIES LTD.: 4.3.1. This was a comparable selected by the TPO. Before the TPO, assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand effecting profit margin. The TPO, however, .....

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et leader in software development activities, whereas assessee is merely a software service provider and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). 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 .....

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epartmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 4.3.4 We have heard the rival submissions and perused and carefully considered the material on record. We are inclined to concur with the argument put forth by assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangibles and has huge revenues from software products. It is also seen that the break-up of revenue from software servi .....

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), Bangalore I.T.(T.P.)A.No.1303/ Bang / 2012 dated 28.11.2013. iii) Adaptec (India) P. Ltd., Hyderabad vs. ACIT, Circle 1(1), Hyderabad ITA.No.1758/Hyd/2012 dated 21.03.2014. iv) M/s. Patni Telecom Solutions P. Ltd., Hyderabad vs. ACIT, Circle 16(3), Hyderabad ITA.No.1846/ Hyd/ 2012 dated 25.04.2013. AO/TPO is directed to exclude this company from the list of comparables. 4. KALS INFORMATION SYSTEMS LTD: 4.4.1 This is a comparable selected by the TPO. Before the TPO, assessee had objected to th .....

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evenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 4.4.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to assessee and ought to be rejected/excluded from the list of comparables for the following reasons :- (i) This company is functionally different from the software activity of assessee as it is into software products. (ii) This company has been held to be different from a software development co .....

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012 dated 28.11.2013. iii) Symphony Services Pune P. Ltd., vs. ITO, Ward 1(4), Pune ITA.No.257/PN/2013 dated 30.04.2014. iv) Triology E-Business Software India Pvt. Ltd. (ITA.No.1054/ Bang/2011). v) LG Soft India Pvt. Ltd. (IT (TP) A No.112/Bang/2011) vi) CSR India Pvt. Ltd. (IT (TP) A No.1119/Bang/2011) and vii) Transwitch India Pvt. Ltd. (ITA No.6083/Del/2010) (iv) The facts pertaining to this company has not changed from Assessment Year 2007-08 to Assessment Year 2008-09 and therefore this co .....

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nt which includes software product revenues from two products i.e. Virtual Insure and La-Vision and b) The Training segment which does not have any product revenues. 4.4.3 Per contra, the learned Departmental Representative contended that the decision of the coordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year und .....

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sessee based on information obtained u/s.133(6) of the Act. We also find that the co-ordinate benches of this Tribunal have 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), assessee has also brought on record evidence from various portions of the company s Annual Report to establish that this company is functionally dissimilar and differ .....

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e TPO. Before the TPO, assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dissimilarity, significant R&D activity, brand value, size, niche products etc. The TPO, however, rejected the contention put forth by assessee and included this company in the set of comparables. 4.5.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to assessee as it performs a variety .....

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to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008- 09 and therefore this company cannot be considered as a comparable to assessee in the case on hand, as the same was excluded in earlier year by ITAT in assessee own case. (iii) Tata Elxsi Ltd. is predominantly engaged in product designing services and is not purely a software development service provider. In the Annual Report of this company the des .....

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Elxsi Ltd. is clearly functionally different / dis-similar from assessee and therefore ought to be omitted form the list of comparables. (v) The learned A.R. further relied on the Coordinate Benches of the Tribunal in the following cases : i) Agnity India Technologies P. Ltd., vs. DCIT, Circle 1(1), New Delhi ITA.No.6485/Del/2012 dated 20th September, 2013. ii) 3DPLM Software Solution Ltd., (Successor to Delmia Solutions P. Ltd.,) Bangalore vs. DCIT, Circle 11(1), Bangalore I.T.(T.P.)A.No.1303/ .....

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ervices relates to design services and are not similar to software development services performed by assessee. 4.5.5 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 ni .....

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facts, we are unable to treat this company as fit for comparability analysis for determining the arm s length price for 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 t .....

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s company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons:- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para .....

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development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (v) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO s own filter of rejecting companies with consolidated financial statements. (vi) The learned A.R. further relied on the following decisions : i) Agnity India Technologies P. Ltd., vs. DCIT, Circle 1(1), New Delh .....

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tal Representative supported the action of the TPO in including this company in the list of comparables. 4.6.4. We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and .....

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t be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate benches cited 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. Respectfully followin .....

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