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AMD India Private Ltd. Versus The Income Tax Officer, Ward 11 (1) , Bangalore and vice -versa

2015 (6) TMI 979 - ITAT BANGALORE

Transfer pricing adjustment - selection of comparable - Held that:- Avani Cincom Technologies Ltd., KALS Information Systems Ltd. and Celestial Labs Ltd. be omitted from the list of comparables.

KALS Information Systems Ltd.company was developing software products and was not purely or mainly a software service provider thus need to be excluded

Bodhtree Consulting Limited company is not a good comparable in view of the software products produced by the company. As such, no .....

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Seg.) and Sasken Communication Technologies Ltd. (Seg.) companies have been excluded from the list of comparables on the ground that these companies have a turnover filter above ₹ 200 crores and cannot be compared with the assessee, whose turnover is only ₹ 66.94 crores.

Wipro Ltd. be excluded from the list of comparable companies.

Thirdware Solutions Ltd. and Lucid Software Ltd. companies be omitted from the list of comparables for the period under consideratio .....

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om the list of comparables.

Birla Technologies Ltd. company should be taken as a comparable as there is no other basis for rejecting this company as comparable assigned by the TPO

Indium Software (India) Ltd t export turnover filter of this company was 37.77% of its total turnover and therefore this company passes the export revenue filter of more than 25% of the turnover and has to be regarded as a comparable.

Excluding the lease line expenses from the total tur .....

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cted against the order dated 30.1.2013 of the CIT(Appeals)-IV, Bengaluru for the assessment year 2008-09. 2. In the appeal by the Revenue, grounds No. 1 to 8 read as follows:- 1. The order of the ld. CIT(Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly in excl .....

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reflect the normal industry trend. 5. The ld. CIT(A) erred in not appreciating that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party. 6. The ld. erred in rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services and thereby including M/s Indus Networks Ltd. as a comparable. 7. The learned CIT(A) in the facts .....

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ds No. 1 to 7 are with reference to the addition made by the TPO to the total income of the assessee, consequent to determination of ALP of an international transaction carried out by the assessee with its AE under the provisions of 92 of the Incometax Act, 1961 [ the Act ]. Ground No.8 is with regard to charging of interest u/s.234B of the Act. These grounds read as follows: 1 Assessment and reference to Transfer Pricing Officer are bad in law a) The order issued by the Income-tax Officer - War .....

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nt ] has satisfied all the conditions as laid out in section 92C(3) of the Act. Accordingly, the order passed by the TPO is without jurisdiction. c) The order passed by the Ld. CIT(A) and AO is without jurisdiction, inter alia, insofar as it purports to give effect to an invalid order of the TPO. d) The Ld. CIT(A) erred in confirming the action of the AO/TPO in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its inter .....

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rtaken by the TPO is bad in law The Ld. CIT(A) erred in law in holding that the fresh comparability analysis using non contemporaneous data conducted by the TPO and further substituting the Appellant s analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the TPO is liable to be quashed. 4 Comparability Analysis adopted by the TPO for determination of arm s length price a) The AO/TPO grossly erre .....

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omparability and the Ld.CIT(A) also erred in confirming the same. c) The AO/TPO erred on facts in arbitrarily rejecting companies having onsite revenues more than 75% of total sales and the Ld.CIT(A) also erred in confirming the same. d) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables and the Ld.CIT(A) also erred in confirming the .....

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ts in arbitrarily rejecting companies based on their financial results without considering the functional comparability and the Ld.CIT(A) also erred in confirming the same. h) The AO/TPO erred on facts and in law in considering a set of secret data , i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6) of the Act, which is grossly unjustified. The Ld.CIT(A) also erred in confirming the same i) The AO/TPO cherry picked co .....

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w and the CIT(A) further erred in confirming use of data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law and the CIT(A) further erred in confirming non-application of multiple-year data while computing the margin of alleged comparable companies. 6 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts i .....

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AO/TPO erred in law and the Ld. CIT(A) erred in not granting the variation as per the proviso to Section 92C(2) of the Act. 8 Interest under section 234B of the Act On the facts, and circumstances of the case, and in law, the learned CIT(A) erred in not directing the learned AO on the specific ground taken in appeal that the learned AO had erred in levying interest under section 234B. 4. The assessee has also filed an additional ground of appeal which reads as follows:- 1. The lower authorities .....

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that these companies are not comparable functionally or otherwise with a software service provider company such as the assessee. Hence the assessee has raised the aforesaid additional ground and prayed for admission of the same. The assessee has submitted that all facts are already available on record and it is a question of applying the decisions rendered in cases of companies engaged in software development services. 6. We have considered the request for admission of additional ground and are .....

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the taxpayer has chosen the said company as a comparable. Keeping in mind the aforesaid decision of the Special Bench, we admit the additional ground for adjudication. 7. Since the grounds raised by the Revenue and assessee are common, we deem it appropriate to dispose of these grounds together. The facts material for adjudication of these grounds are as follows. 8. AMD India Private Limited [ AMD IPL or the Appellant or Assessee ] was incorporated on March 15, 2004 and is a subsidiary of Advanc .....

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t had conducted a transfer pricing study [ TP study ] in terms of section 92D of the Act. In the TP Study, in respect of its software development services the Appellant arrived at a set of 20 comparable companies, having an average net cost plus margin of 14.53% as against that of 11.01% of the Appellant. Since the Appellant s margin was in the 5% (as provided in the second proviso to section 92C(2) of the Act) range of the arithmetical mean of the comparables, the international transactions of .....

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new companies and proposed to compare the same with the Appellant; c) determine the arm s length margin of 32.07% (working capital adjustment not provided); and d) proposed a transfer pricing adjustment to the international transactions to the tune of ₹ 126,991,063. 12. In response to the above, the Appellant made detailed submissions on 27 October 2011, placing on record, all legal and factual arguments before the TPO. 13. The TPO passed an order under section 92CA of the Act, on 28 Octob .....

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Appellant at ₹ 71,091,305. The draft assessment order was served to the Appellant on 22 December 2011. 15. The Appellant filed a letter dated 1. January 2012, requesting the AO to pass the final assessment order as the Appellant did not wish to file objections before the Dispute Resolution Panel. Accordingly, the AO issued the assessment order under section 143(3) of the Act read with 144C of the Act, on 9 February 2012. The same was served on the Appellant on 18 February, 2012. 16. The co .....

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ms International (Seg) 15.30 14 R S Software (India) Ltd. 7.41 15 Sasken Communication Technologies Ltd. (Seg) 7.58 16 Tala Elxsi (Seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd. 16.50 Arithmetic Mean 23.65 23.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Based on this, the arms length price of the software services rendered by the taxpayer to its .....

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Price as under: Arms Length Price (ALP) At 122.64% of operating cost ₹ 739619218 Price charged in the international transactions ₹ 669498745 Shortfall being adjustment u/s.92CA Rs.3,43,55,770 The above shortfall of ₹ 3,43,55,770/- is treated as transfer pricing adjustment u/s 92CA. 17. Aggrieved by the aforesaid order of the AO, the assessee filed appeal before the CIT(Appeals). The CIT(Appeals) accepted some of the contentions put forth by the assessee with regard to the appli .....

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Ltd. 6.46% 7.73% 6 R Systems International Ltd. (Seg.) 16.87% 15.02% 7 Thirdware Solution Ltd. 21.92% 20.11% 8 Softsol India Ltd. 15.16% 13.22% 9 Lucid Software Ltd. 16.88% 16.79% 10 Helios & Matheson Information Technology Ltd. 33.67% 30.35% Average 20.88% 19.89% 18. It can be seen from the aforesaid chart that Helios & Matheson Information Technology Ltd. was retained as comparable by the CIT(Appeals), though the TPO did not include this company as a comparable in the final list of co .....

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this filter because the application of this filter does not serve any useful purpose since the other filters like turnover and functionality are also applied in the case of assessee. It can thus be seen that the employee cost filter in the case of Helios & Matheson Information Technology Ltd. was less than 25% of the sales. If this filter is held to be a valid filter, then this company should be excluded from the list of comparable companies. 19. Aggrieved by the order of the CIT(Appeals) a .....

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lying on the order of CIT(A) in support of the grounds of appeal raised by the assessee in its appeal, relied on the grounds raised by the Revenue in its appeal so far as it relates to appeal by the Revenue. 21. The ld. counsel for the assessee filed before us a chart showing as to how companies retained by the CIT(A) have to be accepted and also showing as to how some of the comparable companies included by the CIT(A) are validly excluded based on the decisions rendered by the Tribunal in sever .....

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e decisions will not be of any help and making a reference to one such decision would be sufficient. In the case of 3DPLM Software Solutions Ltd. v. DCIT, IT(TP)A No.1303/Bang/2012 for A.Y. 2008-09, order dated 28.11.2013, this Tribunal has held as under on choosing this company as a comparable:- 7.0 Avani Cincom Technologies Ltd. 7.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not .....

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f the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the 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 the 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. It wa .....

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It was also submitted that this company has been held to be functionally not comparable to the assessee by a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013. 7.3 The learned Authorised Representative further submitted that the facts pertaining to this company has not changed from the earlier year (i.e. Assessment Year 2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this co .....

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in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof :- 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted .....

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le to the facts of the assessee's case also. Unless the facts and the FAR analysis of Trilogy case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Trilogy case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Trilogy E-Business Software India Pvt. Ltd. (supra .....

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ndant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Trilogy E-Business Software India Pvt. Ltd. (supra) are identica .....

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assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. The learned Authorised Representative submits that this company was selected as a comparable by the TPO not by any FAR analysis or as per the search process conducted by the TPO, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on th .....

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only on the basis of FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned Authorised Representative also submitted that he has brought on record sufficient evidence to show that the functional profile of this company remains unchanged from the earlier year and hence the findings rendered by the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in other cases like Trilogy E-Business Software India Pvt. L .....

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on 133(6) 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 Authoris .....

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07-08, the 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 decisi .....

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n of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007- 08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the empl .....

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(ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that - ….. As explained earlier, it is a diversified company and therefore cannot be considered .....

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service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. in ITA No.112/Bang/2011, CSR India Pvt. Ltd. in IT(TP)A No.1119/Bang/2011 and by the ITAT, Delhi Bench in the case of Transwitch India Pvt. Ltd. in ITA No.6083/Del/2010. (v) The facts pertaining to this company has not changed from Assessment Year 2007-08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the instant ca .....

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nue to be applicable for the period under consideration i.e. Assessment Year 2008-09. 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have sele .....

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decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dissimilar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has a .....

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essment Year 2007-08 in ITA No.845/Bang/2011 and Trilogy E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed. 10. KALS Information Systems Ltd. 10.1 This is a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on grounds of functional differences and that the segmental details have not been pr .....

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sentative contended that this company is not functionally comparable to the 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 the assessee as it is into software products. (ii) This company has been held to be functionally not comparable to software service providers for Assessment Year 2007-08 by the co-ordinate bench of this Tribunal in the assessee's own case. This .....

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Ltd. (IA 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 company cannot be considered for the purpose of comparability in the case on hand and hence ought to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative drew our attention to various parts of the Annual Report of this company. (v) This company is engaged not only in the developmen .....

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co-ordinate bench of the Tribunal in the case of Trilogy 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 under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the detai .....

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t by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) 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), the assessee has also brought on record evid .....

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Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly. 17. Respectfully following the aforesaid decision rendered by the coordinate Bench of this Tribunal, we direct exclusion of the aforesaid three companies from the list of comparable companies. 18. Bodhtree Consulting Ltd. : As far as this company is concerned, the Mumbai Tribunal in the case of Nethawk Networks India (P.) Ltd. v. ITO, ITA No.7633/Mum/2012 for A.Y. 2008-09, order dated 6.11.2013, held that th .....

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this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as prod .....

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he Id Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end w .....

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evenue from ITES activity to the extent of ₹ 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3 ** ** ** 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO H .....

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st of final comparables for working out the arithmetic mean. 19. Respectfully following the aforesaid decision of the ITAT Mumbai Bench of the Tribunal, we hold that the aforesaid company be excluded from the list of comparable companies. 20. (1) E-Zest Solutions Ltd. (2) Quintegra Solutions Ltd. As far as these companies are concerned, this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) held as follows:- 14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as .....

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company ought to be excluded from the list of comparables on the ground that it is functionally different to the 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. These services, the learned Authorised Representative contends, are high end ITES normally categorised as kno .....

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arned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list o .....

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d 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 the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal .....

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18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee' .....

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ot in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), pr .....

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d by the company …………… have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks. (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO s own filter since there have been acquisitions in this case, as .....

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ion. 18.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is .....

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IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.5 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the .....

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e direct the AO that the aforesaid companies be excluded from the list of comparables. 22. (1) Flextronics Software Systems Ltd. (2) iGate Global Systems Ltd. (3) Infosys Technologies Ltd. (4) Mindtree Ltd. (Seg.) (5) Sasken Communication Technologies Ltd. (Seg.) All these companies have been excluded from the list of comparables on the ground that these companies have a turnover filter above ₹ 200 crores and cannot be compared with the assessee, whose turnover is only ₹ 66.94 crores .....

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e-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate ad .....

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asis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- Size criteria in terms of Sales, Assets or Number of Employees: The size of .....

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e under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered int .....

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mparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet s analysis, the turnover of ₹ 1 crore to ₹ 200 crores was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on th .....

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to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the .....

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assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). .....

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. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Sec.92-B provides that international transaction means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible .....

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prises. Sec.92- A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm s length price in an international transaction and it provides:- (1) that the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropr .....

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plied, for determination of arm s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international tran .....

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ept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm s le .....

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te method, in the following manner, namely :- (a)……. to (d)…….. (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelat .....

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gin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with referen .....

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e respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the dif .....

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elating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transa .....

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filter is an important criteria in choosing the comparables. The assessee s turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. cou .....

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4. Respectfully following the aforesaid decision, we direct the aforesaid companies be excluded from the list of comparables. 25. Tata Elxsi Ltd.: Comparability of this company was considered by this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) and it was held as under:- 13. Tata Elxsi Ltd. 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional .....

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ing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telecordia Technologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining 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 20 .....

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t activities which has resulted in the Embedded Product Design Services Segment of the company to create a portfolio of reusable software components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons, Tata Elxsi Ltd. is clearly functionally different / dis-similar from the assessee and therefore ought to be omitted form the list of comparables. 13.3 Per contra, the learned Departmental Representative supported .....

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the assessee. 13.5 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 niche product and development services which is entirely different from the assessee company. We ag .....

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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 hand. It is ordered accordingly. 26. Wipro Ltd.: As far as this company is conc .....

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aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this 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 .....

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(ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purp .....

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een 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 software services. The TPO appears to have adopted this company 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 .....

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ovider 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 bench of the Tribunal 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 t .....

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nclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned .....

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for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submis .....

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as directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 16. Lucid Software Ltd. 16.1 T .....

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vice providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. .....

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es that it is in the business of product development. The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i. .....

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hand, is in the business of providing software development services. We also find that, co-ordinate 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 ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product d .....

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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. 29. Respectfully following the aforesaid decision, we direct that the aforesaid companies be excluded from the list of comparable companies. 30. Persistent Technologies Ltd.: As far as this company is concerned, this Bench in the case of 3DPLM S .....

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egmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualifi .....

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is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in Outsourced Software Product Development Services for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another compan .....

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parables. 17.3 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details 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 a .....

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ew of the aforesaid decision, we direct that Persistent Technologies be excluded from the list of comparables. 32. Helios & Matheson Information Technology Ltd. : This company was a comparable included by the CIT(Appeals) in the impugned order. The application of employee cost filter of 25% of the sale is an accepted filter. In the case of First Advantage Offshore Services, ITA No.1086/Bang/2011, this Tribunal has held that the aforesaid filter is a valid filter and has to be accepted for ch .....

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n pointed out before us that export revenue of this company is 88.97% of its turnover and therefore it passes the export revenue filter of 25% of the turnover and has to be selected as a comparable. Our attention was drawn to the decision of this Tribunal in the case of IBM India Pvt. Ltd. v. JCT, 2014 46 taxman.com 129 (Bang. Trib), wherein it was held that this company passes the export revenue filter and has to be regarded as a comparable. Following were the relevant observations:- 1. M/s Bir .....

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ctor s report that the entire income were derived from exports. It thus, appears that the reason assigned by the TPO for rejecting this company as comparable which was for the reasons that the company has export sales of less than 25% of the total sales is on an erroneous basis. We therefore, hold that this company should be taken as a comparable as there is no other basis for rejecting this company as comparable assigned by the TPO. 34. Indium Software (India) Ltd.: This company was also reject .....

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id claim of the assessee and if found correct, to include the above two companies as a comparable. 36. Now, we shall deal with the specific grounds raised by the Revenue. As far as ground No.2 is concerned, we have already given reasons as to why size and turnover was a relevant criterion for choosing companies as a comparable. The decisions referred to while deciding the relevant filter have taken the view that turnover and size is a relevant criterion for deciding the comparables. Accordingly, .....

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rds ground No.6, we have already held, following the decision of the Tribunal in the case of First Advantage Offshore Services (supra) that 25% employee cost to sales is a valid filter and therefore ground No.6 raised by the Revenue is without any substance. 40. As far as ground Nos.7 & 8 are concerned, we have already excluded these companies following the decision of the Tribunal wherein these companies were held to be not comparable. The grievance projected by the Revenue is therefore hel .....

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