TMI Blog2015 (11) TMI 538X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be excluded, for other reasons, we are of the opinion that the submission warrants consideration. These companies will be considered by us when we take up the appeal of the assessee, while adjudicating on the grounds taken by the assessee seeking exclusion of certain comparable companies. - Partly in favour of revenue. Eligiblity for 5% deduction while making the ALP analysis relying on proviso to Section 92C(2) - Held that:- The impugned assessment year being 2005-06, the proviso to Section 92C(2) as it stood prior to substitution brought in by Finance (No.2) Act, 2009, w.e.f. 1.10.2009 applied. The question whether + / - 5% disallowance could be allowed as a standard deduction, had come up before this Tribunal in the case of Sap Labs India P. Ltd v. ACIT [2010 (8) TMI 676 - ITAT, BANGALORE ]. CIT (A) had followed the Coordinate Bench decision in Sap Labs India P. Ltd (supra), wherein it was held that prior to the substitution, the second limb of the old proviso could be construed as a standard deduction available to the assessee. - Decided against revenue. Exclusion of certain companies from the list of comparables questioned by assessee - Held that:- . Though abno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 2005-06. 02. Appeal of the Revenue is taken up first for disposal. Revenue has raised altogether seven grounds of which grounds 1, 6 and 7 are general needing no specific adjudication. 03. Grievance raised by the Revenue in its ground.2 is that CIT (A) directed exclusion of telecommunication expenditure of ₹ 2,74,80,645/- and foreign currency expenditure of ₹ 3,73,26,570/- from total turnover while computing the deduction available u/s.10A of the Income-tax Act, 1961 ( the Act in short). 04. We find that the direction given by the CIT (A) is in consonance with the judgment of Hon ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd (349 ITR 98). Their Lordships held that parity has to be there between export turnover and total turnover while excluding items from the export turnover. Filing SLP before the Hon ble Apex Court, would not be a sufficient reason not to follow the jurisdictional High Court judgment. Accordingly ground 2 of the Revenue is dismissed. 05. In its ground 3, grievance raised by Revenue is that the CIT (A) directed exclusion of all comparables that were having any related party transactions (RPT) from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15 percent of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the impact of the related party transactions vis- -vis sales and not profit since profit of an enterprise is influenced by large number of other factors . Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Officer / TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15 percent of total revenues for the financial year 2003- 04. 09. Accordingly we are of the opinion that CIT (A) fell in error in directing exclusion of comparables which were having any RPTs. RPT ratio has to be considered at 15% in accordance with the above decision. Vis-a-vis argument of the Ld. AR that a few of the companies which come back to the list of comparables, still had to be excluded, for other reasons, we are of the opinion that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % disallowance could be allowed as a standard deduction, had come up before this Tribunal in the case of Sap Labs India P. Ltd v. ACIT [(2011) 44 SOT 0156]. CIT (A) had followed the Coordinate Bench decision in Sap Labs India P. Ltd (supra), wherein it was held that prior to the substitution, the second limb of the old proviso could be construed as a standard deduction available to the assessee. We do not find any reason to deviate from the view taken by the CIT (A) since it was in consonance with the Special Bench decision. Ground 5 of the Revenue is dismissed. 15. Now we take up the appeal of assessee. Ld. Counsel for the Assessee at the outset submitted that he was confining his arguments to exclusion of certain companies from the list of comparables, as it remained after giving effect to the CIT (A) decision and after applying the 15% RPT filter. According to him, other grounds relating to TP issue could be dealt with at an appropriate time, if required. 16. As per the Ld. AR assessee was a subsidiary of Synopsis Inc, USA, providing captive service in the nature of software development to its AE abroad. According to him, assessee had adopted TNMM as the most appropriate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat CIT (A) directed exclusion of Satyam Infotech Ltd, for a reason that financial result of the company were not reliable. According to him, if CIT (A) s directions were to be given effect, only four companies would be left namely Bodhtree Consulting Ltd, Lanco Global Systems Ltd, Sankhya Infotech Ltd and Visualsoft Technologies Ltd, and these had an average PLI of 20.53%. As per the Ld. AR, CIT (A) had accordingly reduced the TP adjustment to ₹ 2,09,31,455/-. 18. Continuing his arguments, Ld AR submitted that once RPT filter of 15% were adopted, Flextronics Software Systems Ltd, Geometric Software Ltd, iGate Global Solutions Ltd, Infosys Technologies Ltd, L T Infotech Ltd, R S Software (India) Ltd, Sasken Communications Ltd, Sasken Networks Ltd, Satyam Computers Ltd, Tata Elxsi Ltd, and Thirdware Solutions Ltd, would come back to the list of comparables. According to him, assessee had no objections in iGate Global Solutions Ltd, L T Infotech Ltd, R S Software (India) Ltd, Sasken Communications Ltd and Sasken Networks Ltd, coming back to the list of comparables. However according to him, in the case of Infosys Technologies Ltd, CIT (A) himself had rejected it on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e many of the comparables convenient to it would go out of the list of selected comparables. As per the Ld. DR, logic of application of RPT filter of 15% was not clear. Even if comparables were having related party transactions of less than 15%, still it required exclusion. Assessee was attempting selective application of filters according to its choice. As per the Ld. DR this type of approach should not be allowed. 22. We have perused the orders and heard the rival contentions. In relation to appeal of the Revenue, we have already held that 15% RPT filter is a proper threshold for selecting comparables for the purpose of ALP study. That assessee was engaged in software development service, is clear from the profile of the assessee reproduced by the TPO at para 2.2 of its order : 2.5 Synopsys India entered into an agreement with Synopsys USA and Synopsys Ireland to provide R D services in respect of development of EDA tools and software. 2.6 EDA software comprises sof tware programs that are used by engineers as tools in designing ICs. IC's are distinguished by the speed at which they run, their area, the amount of power they consume and the cost of production Syn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... metric Software Solutions Co. Ltd had RPT in excess of 15% can be looked into by the AO / TPO. If it is having RPT of more than 15% of total revenues, no doubt it has to be excluded. 26. Vis-a-vis Infosys Technologies Ltd and Satyam Computers Ltd, CIT (A) had held in favour of assessee and directed their exclusion based on functionality for the former and unreliable financial results for the latter. Revenue has not moved in appeal against such directions. Vis-a-vis Exensys Software Solutions Ltd, what we find is that its comparability was an issue that came up before this Tribunal in the case of Symbol Technologies India P. Ltd. This Tribunal had held at para 14 of the order, as under : 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 showi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to software product segment and segmental results were not available. Reliance has once again been placed on coordinate bench decision in the case of Symbol Technologies India P. Ltd (supra), wherein this Tribunal had held as under, quoting from a decision of Hyderabad Bench of this Tribunal in the case of Invensys Development Centre India P. Ltd v. ACIT [ITA.1251/Hyd/2010, dt.29.02.2014] : 26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 30. Though this Tribunal had directed exclusion of Thirdware Solutions Ltd, what we find is that Hyderabad bench decision of the Tribunal in the case of Invensys Development Centre I. P. Ltd (supra), was admittedly against exclusion of Thirdware Solutions Ltd. Argument of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 software development service. Since company s operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22. 22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: 2. Activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this point it is essential to see the objections raised by the assessee before the TPO and his reply to it : 15.3.1.8 Flextronics Software Systems Ltd : (Tax payer s objections) The taxpayer had rejected this company in the TP study based on company s turnover. In any case, turnover in NASSCOM categorisation has been rejected by the taxpayer. The turnover filter is not an appropriate filter for selection of comparables as has been discussed above. As the company satisfies all the filters applied by the TPO, the same was proposed to be considered as a comparable vide this office letter dated 29.05.2007. The taxpayer has objected to the comparable company vide reply filed on 16.07.07 which is as under : For the reasons mentioned in the ensuing paras Flextronics cannot be considered as comparable company, for the purposes of application of TNMM in the subject proceedings. The relevant extracts from the Annual Report of Flextronics Ltd. (Flextronics) for FY 2004-05 are reproduced below and are attached as Annexures (as mentioned for each of the paras below) for your goodselfs ready reference. At the outset the company submits the business review of Flext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct sales constitute only 16% of the turnover. Companies, which receive more than 75% of their operating income from software development services, have been considered. The company derives its income from the following segments as per the annual report for the year 2004-05: As predominant part of the company revenue (81%) comes from software services the company is treated as functionally similar and retained as a comparable. The overall profit margin of 32.18% has been taken as worked out in the Annexure-B which include the product sale as the company qualifies the filter of 75% SW development service income. Assessee had in a letter written to TPO mentioned that said company was providing product development services, citing the annual report of the said company for F. Y. 2004-05 which inter alia mentioned three streams of its business as software services, sale of product and related services and business of project outsourcing services. TPO had noted that 81% of the revenue of the said company were from billings done on man-hours spent on services and its fixed price revenue was only about 15% of the total service income. In our opinion, TPO has been abl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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