TMI Blog2013 (11) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise, in short AE) a limited liability partnership established and existing under the laws of the State of Delaware, USA having its principal office at New York. The AE is engaged in global financial services in the investment advisory activities, broker dealer activities and computer based quantitative management. The assessee provides software development services to its AE. Therefore, the assessee is purely a captive service provider. The assessee has been recognised as 100% EOU registered under the Software Technology Park of India (STPI) Scheme. As per the terms of the contract with its AE, the assessee is remunerated at cost plus 12% for the services rendered by it to its AE. For the impugned assessment year, the assessee earned revenue of ₹ 63,07,80,968 from international transaction with its AE. The assessee for the impugned assessment year filed its return of income on 29-10-2007 declaring total income of ₹ 54,30,688/-. Along with return of income, the assessee also submitted a TP study report wherein transaction Net Margin Method (TNMM) was adopted as most appropriate method and operating profit/operating cost as the profit level indicator (PLI). The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany i.e. Celestial Labs Limited, which the DRP directed to be excluded from the list of comparables. In pursuance to the directions of the DRP, the Assessing Officer passed the final assessment order by excluding Celestial Labs Limited. As a result of which the transfer pricing adjustment was reduced to ₹ 5,55,78,968/-. Being aggrieved of the aforesaid order passed by the Assessing Officer, the assessee has preferred this appeal raising various grounds both on transfer pricing issues as well as corporate tax issues. 5. At the outset, the learned AR submitted that he does not want to press ground Nos. 2.4.1, 2.4.2, 2.4.4, 2.5.1, 2.6.1, 2.7.1, 2.8.1, 4.1, 5 and 6. Hence, these grounds are dismissed as not pressed. 6. Ground Nos.1.1, 2.1.1, 2.1.2 and 2.1.3 being general grounds are not required to be adjudicated upon. 7. In ground No. 2.2.1 to 2.2.3 the assessee has raised the issue of rejection of its claim for risk adjustment. 8. In ground 2.3.1, the assessee has challenged the rejection of two comparable companies selected by it namely Akshay Software Technology Limited and MAARS Software International Limited. 9. In ground 2.3.2 to 2.3.4, the assessee has cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the assessee as mentioned hereinbefore. 14. The learned AR specifically objecting to each of the comparable companies submitted that so far as ACCEL TRANSMATICS LIMITED is concerned, the said company cannot be treated as a comparable as it is functionally different, not being a purely software development service provider. He further submitted that considering the fact that this company is not a purely software development service provider, different benches of the Tribunal have held that M/s Accel Transmatics Limited cannot be compared with a purely software development service provider. It was submitted that taking into consideration the view of different benches of the Tribunal, the ITAT in case of Intoto Software India (P) Ltd. (supra) has held that Accel Transmatics Limited cannot be a comparable as it is not a purely a software development service company. 15. With regard to AVANI CIMCON TECHNOLOGY LIMITED also, the learned AR advanced similar argument and contended that the website of Avani Cimcon Technology Limited clearly reveals that the said company is engaged in product development, hence is functionally different from the assessee. That besides it was furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as Virtusa (India) (P.) Ltd. (supra). 19. The next company which was objected to by the learned AR is KALS INFORMATION SYSTEMS LIMITED (seg). The learned AR submitted that this company cannot be treated as comparable to the assessee as it is not only engaged in development of product but its employee cost is less than 25%. The learned AR submitted that co-ordinate bench of this Tribunal in case of Intoto Software India (P) Ltd. (supra) after following the decision of the Bangalore Bench of the Tribunal in case of Trilogy E-Business Software India (P.) Ltd v. Dy. CIT [2013] 140 ITD 540 and HCL EAI Services Ltd. v. Dy. CIT [2013] 35 taxmann.com 146 (Bang.) (Trib.) has held that Kals Information Systems Limited (seg) cannot be treated as comparable with a purely software development service provider. 20. For the same reason, the assessee also requested for excluding M/S LUCID SOFTWARE LIMITED from the list of comparables. 21. The learned AR objecting to MEGASOFT LIMITED being treated as comparable submitted that apart from the fact that Megasoft Limited is predominantly a product development company, on 1-10-2006 another company i.e. Visual Soft has merged with Megasoft an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussions made by the TPO in case of each of the companies objected to by the assessee submitted that the TPO after considering all the aspects and as well as the objection of the assessee has selected the aforesaid companies as comparables as they were found to be functionally similar to the assessee and satisfied all the filters. With regard to Accel Transmatics Limited and Avani Cimcon Technology Limited, the learned Departmental Representative submitted that since the TPO has only considered the revenue earned from software segment, there is no reason to exclude these two companies. The same argument was also advanced in case of Flextronics Software Systems Limited (seg). So far as Ishir Infotech Limited is concerned, the learned Departmental Representative submitted that though the payments have been termed as professional fee, but it is actually salary. Hence, this company qualifies the employee cost filter. In case of Kals Information Systems Limited (seg), it is contention of the learned Departmental Representative that this company has been rightly retained as a comparable as it qualifies all the filters applied by the TPO. So far as Lucid Software Limited and Megasoft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purely software development service provider. In fact the TPO has selected the same set of 26 comparable companies in case of the assessee which were also selected in case of Intoto. Therefore, in our view, the decision of the co-ordinate bench in case of Intoto Software India (P.) Ltd. (supra), will also apply to the facts of the present case in so far as selection of comparables are concerned. Having held so, we will now consider each of the companies objected to by the assessee. 26. Avani Cimcon Technology Limited and Accel Transmatics Limited:- It is the contention of the assessee that both these companies are not comparable as they are into product development. So far as Accel Transmatics is concerned, it is the further contention of the assessee that the said company has also sold one of its divisions during the relevant financial year and if this slump sale is excluded, this company will be a loss making company. On perusal of the material on record, we find that both the aforesaid companies were considered by the ITAT, Bangalore Bench in case of Triology E. Business Software India (P.) Ltd. (supra), the ITAT Bangalore Bench held that since these two companies are into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or23services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis. It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service company, respectfully following the aforesaid decisions of co-ordinate benches of this Tribunal, we direct exclusion of the aforesaid two companies from the list of comparables. 27. Flextronics Software Limited and Thirdware Software Solutions Limited:- The assessee has objected to these two companies to be treated as comparable mainly on the ground that both these companies are into product development. We find that in case of Intoto Software India (P.) Ltd. (supra) the co-ordinate Bench of this Tribunal having found that these two companies are functionally different as they are into product development has directed excluding these companies for comparability analysis. Respectfully following the decision of the co- ordinate bench of this Tribunal in case of Intoto Software India (P.) Ltd. (supra) we also direct the Assessing Officer/ TPO to exclude both these companies. 28. Infosys Limited and Wipro Limited:- Having considered the submissions of the parties, we are of the view that these two companies cannot be compared to the assessee as comparables due to various factors such as their size, turnover, brand value, diversified activities owning of intangibles etc. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id Software are concerned, learned Counsel for the assessee submitted that these companies are functionally different from the assessee and as far as Lucid Software is concerned, segmental data is also not available. Thus, according to him, these two companies are also to be excluded from the list of comparable companies. In support of his contention, the learned Counsel for the assessee relied upon the decision of the Bangalore Tribunal in the case M/s. Trilogy E-Business Software India Private Limited (supra) wherein at paras 46 and 47 of its order, the Tribunal has discussed the functional dissimilarity of the said companies with the assessee therein and has directed that the company should be excluded from the list of comparables. Similarly, the Tribunal at Bangalore in the case of M/s. HCL EAI Services Ltd. v. DCIT IT(TP)A.No.1348/Bang/2011 at para 17 at pages 24 to 26 of its order has discussed at length the reasons for not considering the said company as comparable to software development services company. The relevant portion of the respective order is reproduced hereunder : (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable . 17. As far as Sl.No.14 of the list of comparable chosen by the TPO is concerned viz., Lucid Software Ltd., is concerned, this Tribunal in the case of CSR India Ltd. in ITA No.1119/Bang/2011, order dated 29.01.2013 for AY 07-08, had considered the comparable of this company with a software service provider like the assessee and has come to the conclusion that the same is not comparable, on the ground that this company was software developer. The following were the relevant observations of the Tribunal:- (E) Lucid Software Limited 3.4.2. The above company has been rejected as comparable in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra). The submissions and the finding of the Hon'ble Mumbai Tribunal is reproduced below:- 7.2 Lucid Software Limited: It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent services to its parent companies. The assessee is also into similar type of activity. Therefore, the decision taken in M/s. Trilogy E Business Software India Private Limited as well as M/s. HCL EAI Services Ltd. to exclude Lucid Software and Kals Information Systems Ltd. applies to the facts of the case before us also. Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude these two companies also from the list of Comparables Respectfully following the aforesaid decision of the co-ordinate bench, we direct the Assessing Officer/ TPO to exclude these two companies from the list of comparables. 31. Megasoft Limited:- The main objection of the assessee with regard to the aforesaid company is that this is predominantly a product development company and margin from software development services is 23.11%. As can be seen in case of Intoto Software India (P.) Ltd. (supra) the co-ordinate bench of the Tribunal while considering the assessee's objection with regard to the aforesaid company had directed the Assessing Officer/TPO to take only segmental margin of this company for computing ALP. Respectful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing two comparables selected by the assessee. (i) Akshay Software Technologies Limited (ii) MAARS Software International Limited The learned AR objecting to the rejection of the aforesaid two comparables submitted that the TPO has excluded Akshay Software Technologies Limited by applying onsite revenue filter. The learned AR submitted that application of on-site revenue filter is not correct as relevant data is not available in public domain. In so far as MAARS Software International Limited is concerned, the learned AR submitted that the TPO has rejected this company on the ground of functional difference and also on the view that it operates through its branch. He submitted that another ground for rejection of the aforesaid company is because the onsite revenue of the company is 100%. In this context, the learned AR referring to the Directors report as contained in page 1 of the annual report of MAARS Software International Limited submitted that the Assessing Officer was not correct in holding that the company operates through its branch. The learned AR further referring to page 22 of annual report submitted that the company is a software development company and hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer, one of the Members while considering the issue held as under:- It is an accepted canon in economics and business that risk and reward go together. I am convinced of the necessity for providing risk adjustment between the risk free captive service provider and the full risk bearing independent enterprises. Two methods, though not perfect, but reasonably good and used by practitioners in business and management are available for measuring the quantum of adjustments. Under CAPM, the risk adjustment works out to 4.57%. The risk adjustment comes to 5.25% under the interest rate differential method. It is fair to accept one of the methods and provide the risk adjustment to the finally selected comparables for nullifying the risk differences. Offcourse, identification of risks, assessing them, selection of appropriate tools and methods for measuring them, providing appropriate adjustment to the financials of the companies, etc., fall within the domain of experts from economics and management fields. It may be right to refer this issue to their expert opinion and determination to minimize the subjectivity as much as possible. 37. The learned AR submitted before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is difference of opinion between the members of the DRP on this issue as one of the Members of the Panel has allowed the assessee's claim with regard to risk adjustment. 38. The learned AR submitted that in case of Intellinet Technologies India (P.) Ltd v. ITO 53 SOT 92 (Bang.) (URO) the ITAT, Bangalore Bench while considering identical issue has held that single customer risk is a future and anticipated risk whereas marketing and technical risk undertaken by comparables being existing risks, the assessee is eligible for risk adjustment at a appropriate percentage. The learned AR relying upon a decision of ITAT, Hyderabad Bench in case of Dy. CIT v. Hellosoft India (P.) Ltd. [2013] 32 taxmann.com 101 submitted that the co-ordinate bench of this Tribunal considering the fact that the assessee is a captive service provider without undertaking any risk has allowed benefit of 1% towards risk adjustment. Relying upon the aforesaid decision of co-ordinate bench, the learned AR submitted that 1% benefit towards risk adjustment may be allowed to the assessee. 39. The learned Departmental Representative, on the other hand, strongly supporting the order of the DRP as well as TPO on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here an assessee which is a captive service provider and does not assume any risks then it is entitled for risk adjustment which was quantified at 1%. Considering the totality of facts and circumstances and also the fact that the TPO himself has computed risk adjustment at 0.73%, we are inclined to allow the benefit of risk adjustment to the assessee at 1%. So far as the decisions relied upon by the DRP in the case of Deloitte Consulting India (P.) Ltd. and Symantec Software Solutions (P.) Ltd. (supra) are concerned, they are factually distinguishable as has been clearly brought out in the submissions of the learned AR. Before parting, we would like to add that our decision on the issue of risk adjustment is purely in the context of the peculiar facts involved in the case of the present assessee and cannot be considered to be laying down a precedent to be applied uniformly to all cases. The assessee's grounds raised on this issue are partly allowed. 42. Since the finding given by us while deciding ground No. 2.3.1. and ground Nos. 2.3.2 to 2.3.4 also covers the issue raised in ground No. 2.4.3, there is no need to adjudicate this ground separately. 43. Ground Nos.3.1 to 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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