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2016 (10) TMI 57 - ITAT CHENNAI

2016 (10) TMI 57 - ITAT CHENNAI - TMI - TPA - Treatment to sale consideration - receipt in the nature of non-compete fee or slump sale - capital gain OR business income - Held that:- On perusal of the terms and provisions of software and business transfer agreements referred by the ld. Assessing Officer in the Draft assessment order and agreement of sale the consideration payable, prime facie is slump sale and such transactions cannot be considered as a non compete fee chargeable to tax. Further .....

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ss transfer are not covered under Rule 10AB. - TPO directed to eliminate the upward adjustment on Business value transferred to the Associated Enterprise. - TPO adjustment on sale of software services business to the Associated Enterprise - Held that:- software services remained in India before the transfer and after transfer and both transfer took place within India and there is no evasion of tax and TPO provision are not applicable. - In respect of TPO adjustments on sale of software servi .....

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directed against order passed u/s.143(3) r.w.s. 144C (13), 92CA(3) dated 21.01.2015, and 250 of the Income Tax Act, 1961 (herein after referred to as the Act ). Since the issue in these appeals and Cross objections are common in nature, these appeals are clubbed, heard together, and disposed of by this common order for the sake of convenience, first, we take up Revenue appeal in ITA No.557/Mds/2015 of assessment year 2010-2011 for adjudication. 2. The Revenue has raised the following grounds of .....

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treated its personnel as assets. Personnel cannot be treated as 'assets' as defined as per the provision of section 2( 14) of IT ACT. 2.3. The learned DRP fails to note that in the valuation at the time of transfer, personnel have been valued separately, which is clearly in contravention to the provisions of the section 2(42C). The stand taken by the assessee itself is contradictory because on one hand it treats personnel as assets and on the other hand it valuates them separately. Henc .....

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ed line of business. Hence there is an element of non-competition and the non-compete fees is to taxable in the hand so of the recipient of such income with effect from 01.04.2013 u/s 28(va) of the IT Act 1961. 2.5. The DRP has failed to note that the Assessing Officer had clearly established with detailed reasoning in the assessment order . 3. The Brief facts of the case are that the assessee company is in business of Software Development filed Return of Income on 04.09.2010 with total income o .....

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ere value exceeds B15 Crores and the ld. TPO relied on the Arms Length Price (ALP) as mentioned in form No.3CEB and passed order u/s.92CA of the Act with upward adjustment of B39,84,34,513/- towards Associate Enterprise sales and the business value transferred to the Associated Enterprise. The ld. Assessing Officer made other additions and passed draft assessment order u/s.143(3) r.w.s. 144C(1) of the Act dated 28.03.2014. Subsequently, assessee filed objections in form 35A alongwith relevant an .....

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business as going concern. The assessee filed objections but ld. Dispute Resolution Panel considered the information determined value of business and sale consideration for transferring the business as going concern of Associated Enterprise as determined by the ld. TPO as reasonable and upheld the same. 3.2 In respect of second objection of B2,10,13,546/- on account of sales to Associated Enterprises, the ld. Dispute Resolution Panel found that action of the ld. TPO justifying the upward adjustm .....

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97,967/- was assessed under capital gains u/s.50B of the act and objections of the assessee were favoured. 3.4 The ld. Assessing Officer made addition towards Associated Enterprise sales B2,10,13,546/- as computed by the ld. TPO vide order dated 28.01.2014 and further as dealt in para 3.3 above as the per directions of the ld. DRP, the ld. Assessing Officer considered the entire sale consideration of B49,98,97,967/- assessed under the head Capital Gains as per the provisions and made an addition .....

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ructure and the transaction cannot be considered as slump sale. The ld. DRP has overlooked the facts and mentioned that there is no element of non competition in the transaction. But the assessee compny is transferring the rights, title and interest in the business to the Associated Enterprise and it is a clear case the assessee is forgoing its right to conduct business in such specified line and the amount paid takes the characteristic of non compete fee is taxable in the hands of the recipient .....

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ions as non compete fee is without any basis and charged to income from business. The ld. Assessing Officer should have considered the mode of transactions as transfer. The amount received is a slump sale amount pursuant to takeover of software undertaking by Banca Sella S.p.A. Chennai Branch. The ld. DRP considered the slump sale amount paid is not in the nature of compete fee but differential loss or compensation lost by the assessee company in profit earning capacity. The ld. Authorised Repre .....

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clauses, it is not proper to conclude that there was an element of non-competition in consideration. Secondly, almost the entire business of the assessee is from its AE (holding company). As mentioned in the earlier paragraphs, the assessee is a captive software developer for its AE. The AE has 99.99% share holding in the assessee company. The present sale of the business as a going concern was to the Indian branch of the AE only. When the assessee has transferred its entire business with " .....

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rected to assess the entire sale consideration of ₹ 49,98,97,967 j -, as determined by the TPO, under the head capital gains as per the provisions of sec.50B of the Act. The assessee succeeds in its objections in this regard . The ld. Authorised Representative further submitted that no consideration is attributable to non compete fee if not agreed between parties and prayed for dismissing the appeal. 3.7. We heard the rival submissions, perused the material on record and judicial decisions .....

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n for their exclusive deployment and production for Sella Group Companies. Whereas shareholding of the assessee company 99.99% is held by Sella Holdings Netherlands being outside India and further Sella Holdings Netherlands shares are held 100% by Banca Sella Holding S.P.A. Italy. The assessee has entered into international transactions with his Associated Enterprise. The assessee considering the business module and terms of agreements has transferred software undertaking to company Banca Sella .....

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n the Draft assessment order and agreement of sale the consideration payable, prime facie is slump sale and such transactions cannot be considered as a non compete fee chargeable to tax. Further, the amendment of Sec. 28(va) of the Act was made to tax the non compete fee received from assessment Year 2003-04. Therefore the provision of non compete fee terminology cannot be accepted and we dismiss the ground of the Revenue and upheld the findings of the ld. DRP in treating as income from Capital .....

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towards compensation for impairment of the profit making apparatus and is a capital receipt NOT subject to tax in the hands of the Appellant 2 The AO/TPO/DRP ought to have appreciated that when the amount received is not taxable in the hands of the Appellant provisions of TP are not applicable. 3 In any event, the learned AO/TPO/DRP ought to have appreciated that the normal valuation methods for transfer of business were not applicable to the facts of the case. 4 Without prejudice, the TPO also .....

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in the hands of the assessee. The compensation paid for loss of impairment of profit is a capital receipt not subjected to tax in the hands of the assessee and the amount is not taxable and also Transfer Pricing provisions are not attracted. Further, the assessee was a dedicated Software services provider for the GBS group. The assessee had entered into a Master Services Agreement with Sella Servizi Bancari S.C.p.A ('SSB'), the shared services entity of the GBS group, for the provision .....

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evelopment company that would typically provide its services to a broad customer-base and the Assessee, also performed Software development functions exclusively for a Single customer - viz. SSB. In the previous year 2009-2010, as a part of a reorganization exercise, Assessee's customer (i.e. SSB) decided to undertake the Software development activity under its own umbrella. Consequently, the Software services undertaking of the assessee - including all assets, liabilities and employees - we .....

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for giving-up the software undertaking is in accordance with Arm's Length Principle. Further, Without prejudice to the grounds raised in its appeal, it is submitted that by takingover assessee's Software undertaking and carrying out the Software services on its own, the assessee's customer (i.e. SSB), had effectively stopped giving work to the assessee. The Transaction had the effect of impairing the profit-making apparatus of the assessee, and the Honorable DRP has also specifically .....

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to the takeover of a company by another company. As mentioned the assessee is a captive software developer for its AE. The AE has 99.99% share holding in the assessee company. The present sale of the business as a going concern was to the Indian branch of the AE only. When the assessee has transferred its entire business with "stock-lockbarrel" to another concern where the holding company is directly interested, the assessee can no longer carry on the business, as it has neither any in .....

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e. In the present case, the source of revenue is the existing business and the expected revenue is B4.72 crores per annum. If this business is transferred out, the assessee will be losing its 'revenue earning source' and in its place, a 'new revenue earning asset will come into existence, which is in the form of cash (the sale consideration). In light of the categorical and accurate findings recorded by the Honorable DRP that the Transaction had resulted in loss of profitearning sour .....

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e adequate resources in terms of IT infrastructure, software, manpower etc. In the year 2002, the Bank decided to carry on these activities independently and took-over the senior personnel of 3i infotech handling the back-office operations. A sum of ₹ 15 crores was paid as compensation for loss of business/ future earnings. The said compensation was treated as capital receipt by 3ilnfotech on the ground that the compensation was for loss of a source of income and had affected the profit-ma .....

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ices with any other customer. In effect, the assessee had given up one source of income completely and the compensation received was held to be a capital receipt. The stand of CIT(A) was also upheld by the Honorable ITAT relying on the ruling of the Honorable Supreme Court in the case of Kettlewell Bullen & Co. Vs CIT [1965 AIR 65](SC) and It is also submitted that the aforesaid ruling is squarely applicable to the assessee's case. Further, in light of the Department contention in the af .....

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.I.&M Sales Ltd [259 ITR 116Madras HC], which was rendered on similar facts, although relating to transfer of a distributorship business. The assessee company also wishes to place reliance on the following rulings of the Supreme Court which originally laid down the principles relating to treatment of sum received on impairment of a source of business: • Kettlewell Bullen & Co. Vs CIT [1965 AIR 65](SC); • CITVs Vazir Sultan & Sons [361TR 175](SC); • CIT Vs Shaw Wallace .....

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provisions were not applicable to assessee's case. 4.2 Contra, ld. Departmental Representative has objected to the Cross-objections and opposed that the provisions of Transfer Pricing are applicable even to the transactions in India irrespective of the fact that the Arms Length Price covered u/s. Rule 10AB is applicable to relevant assessment year and vehemently opposed to the grounds. 4.3 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. A .....

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cable only to the International transactions and the valuation method is applied. We perused the provisions of Rule 10AB as under:- For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction [or a specified domestic transaction]shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrol .....

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tread as resident in India. Moreover, under the provisions of DTAA with Malaysia, PE is treated as a separate legal entity, independent of its foreign principal enterprise. Further, Article 24 of the DTAA contains a nondiscrimination provision. It prohibits a Contracting State from making any discrimination in the matter of taxation between its own national and national-of theother Contracting State, who are placed-in similar circumstances. In other words, a Contracting State is obliged to provi .....

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of the affairs of PE are situated in India, the PE should be treated as resident in India, treating PE otherwise amounts to violation of Article 24.Joint venture formed by assessee were resident in India. In the present case, all the decisions relating to the affairs of the Joint Venture are taken in India and the business is executed in India through a Joint Venture Agreement in India. Indisputably, Joint Ventures are residents in India. Ever otherwise, Clause 3 of Article 4 of Malaysia provid .....

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.19 of this order. There is no possibility of shifting of profits outside India on erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits. No shifting of profits outside India or erosion of taxes in India is involved, that is, there is no motive to shift the profits or evade the taxes in India inasmuch as its .....

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her parties which whom the assessee entered into transactions are the residents for the purpose of Indian Taxation. Any transaction between them will not constitute an international transaction. The transactions between the assessee and IJMIs do not fall under section 92B(2) of the Act and same is the position in case of other entities with whom assessee carried on the impugned transactions. In ITAT's opinion, the argument of the is devoid of merit. Accordingly, the legal ground raised by th .....

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ate the upward adjustment on Business value transferred to the Associated Enterprise as the provisions of determining Arms Length Price are not covered under Rule 10AB and accordingly, we partly allow the Cross objections filed by the assessee. 4.4 In the result, the Cross Objection No.45/Mds/2015 filed by the assessee is partly allowed. 5. ITA No.398/Mds/2015 of assessment year 2010-2011 (assessee appeal):- 5.1 The assessee s main ground relating to the TPO adjustment on sale of software servic .....

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were the figure were substituted with Transfer Pricing Officer. The method of value adopted by experts DCF method and NAV method is one of the acceptable valuation method and the same was rejected and DCF valuation was applied. The DCF valuation extended to eight years from four years adopted by the expert valuers and also growth rate projection adopted by the experts valuers estimated specifically for assessee s line of business and the risk-free rate of 4.5% for DCF method for incorrectly dis .....

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r of the assessee in Cross Appeal in para 4.3. Accordingly, we allow the ground of the assessee. 6. The next ground raised by the assessee is that the ld. TPO has made adjustment on consideration received from provision of software services by the assessee. 6.1 The assessee has applied the TNMM analysis whereas the ld. TPO has rejected it and substituted with own analysis. The ld. TPO has erroneously made some comparables by applying arbitrary and incorrect filters and also ld. TPO erred in not .....

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3 We heard the rival submissions and perused the material on record. The comparables obtain by the assessee and ld. TPO has been considered. The assessee filed a chart alongwith comparables to be excluded and included in determining Arms Length Price. The ld. TPO while determing the Arms Length Price has considered the following comparables. 1. Kals Information Systems Ltd 2. Spry Resources India Pvt. Ltd, 3. ICRA Techno Analytics Ltd 4. CTIL Limited, 5. Taksheel Solutions Limited, 6. Thinksoft .....

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that the said company is creating and providing 3D animation software content as a captive service provider to its Associated Enterprise. The company is also providing software development activities and quality assurances services to its Associated Enterprise on an exclusive basis and also provides software maintenance support functions like documentation of the programmed code, IT integration and configuration management to its Associated Enterprise and it is a product development company. The .....

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ative relied on the orders of lower authorities. 6.5 We heard the rival submission, perused the material on record and judicial decisions. The company is not functionally comparable to the assessee company as the company is in providing 3D animation as captive service provider and also provide software development activities and segmental information is not available. Hence, we accept the contention of the ld. Authorised Representative and this company is excluded from the comparables and we dir .....

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le of software. Hence, the financial statements are not reliable. 6.7 We heard the rival submissions, perused the material on record. As per the Annual report of the company, the company has earned Revenue from Software consultancy and sale of software products and there is no breakup of Revenue segment wise between software products and software services. The operating income @16% from work in progress and the software consultancy and products functions differ from software development activiti .....

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ltancy, licensing & sub-licensing fee, web development and hosting. However, no segmental data is available within the broad head of services and relied on the Judicial decisions of Ikanos Communication India P. Ltd in ITA No./137/Bang/2015 and Obopay Mobile Technology India P. Ltd (46 ITR(T) 42. 6.9 We on perusal found that the said comparable company ICRA is in the business of software development & consultancy, engineering and diversified into domain of business analytics and business .....

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ices and other services. The assessee company has not disclosed separate segments for ascertaining profitability and also cannot be regarded for the purpose of TNM analysis. We are of the opinion that the said company should be excluded from the list of comparables and we direct the ld. TPO to exclude. 6.10 In the case of Taksheel Solutions Limited, the ld. TPO worked out margin at 30.72 and the TPO himself sought to reject comparable companies which earned revenues from predominately onsite ser .....

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eject for excluding comparables and the assessee does not succeed on this ground. 6.12 In the case of FCS software solutions Ltd, the ld. TPO worked out margin after providing for working capital at 41.64 and it is also Functionally different in providing ITES services which are not akin to software development services; and no segmental data available in the financial statements of the company and relied on the judicial decisions of TIBCO software (India) P.Ltd in ITA No.94/PN/2014, Barclays Te .....

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of services lines the transaction can be comparable only with IT services comparables and the company derives only 42% of Revenue from the IT consulting. Therefore, the company has not provided segment to ascertain accurate profitability of service lines. Considering the apparent facts, we direct the ld. TPO to compare the comparable company to the extent of segment reporting of only IT consulting and we remit the issue to the ld. TPO. 6.14 In the case of Quintegra Solutions Ltd the assessee has .....

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rsistent loss filter and having accumulated loss and this loss was incurred due to takeover of some companies and due to the takeover and merger with foreign company being a exceptional year cannot be comparable. But the Hon ble High Court in the case of CIT vs. Goldman Sachs (India) Securities Pvt Ltd in ITA No.2222 of 2013 referred at page 4 of order where the question of loss making unit cannot be used a s a comparable for determining Arms Length Price whereas loss making unit is loss due to .....

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ial decisions of Ness Technologies (India) Pvt. Ltd in ITA No.943/2015 and Goldman Sachs (India) Securities Pvt. Ltd in ITA No.7724/Mum/2011. 6.17 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. TPO has wrongly excluded said comparables company as a persistent loss making company. Whereas the said company has earned net profit both in preceding and subsequent year. But the comparable turnover to be current financial year is less than B1 crores .....

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n ITA No.398/Mds/2015 is partly allowed for statistical purpose. 7. Now, we take up ITA No.417/Mds/2015 of assessment year 2010-2011 for adjudication :- The Brief facts of the case are that the assessee company is a 127 year old group comprising of 19 companies, active in many different geographical areas and offering a wide range of banking and financial products and services relating to Banking, Savings Management and Stock Brokerage, Insurance, Corporate Finance Leasing, Consumer Finance. Ran .....

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essed to tax, For the AY 2010-11, BSE India filed a return of Income on 04 September 2010 declaring a total income of B30,39,894/-. and paid a tax of B12,52,437/-. A notice under section 143(2) of the Act was Issued to the Assessee company for initiation of assessment proceedings. During the course of the assessment proceedings the Information called for was dulv furnished by the Assessee. Reference was made by the AO to the Transfer Pricing Officer ("TPO") under Section 92CA of the Ac .....

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014 which was received by assessee on 02 April 2014 and ld. Assessing Officer made additions to the income of the assessee on account of transfer pricing adjustment proposed by the ld. TPO. Aggrieved by the order, the assessee filed an appeal before the Tribunal. 7.1 Before us, the ld. Authorised Representative made a submissions that the ld. TP adjustment made by the ld. TPO upheld by the DRP B31,12,718/- provided to the Associated Enterprise rejected without any reasoning irrespective of the f .....

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roper reasoning and also TPO erred in adopting working capital adjustment margins in respect of transferor of the business Sella Synergy India P. Ltd despite following search methodology as comparables for TNMM analysis and also the ld. TPO further erred in levy of 5% as provided in provision for calculating Arms Length Price of 5% deduction. 7.2 On the other hand, the ld. Departmental Representative relied on the ld. TPO order and supported the inclusive comparables and opposed to the exclusive .....

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software maintenance support functions like documentation of the programmed code, IT integration and configuration management to its Associated Enterprise and it is a produce development company and relied on the judicial decisions Ikanos Communication India P. Ltd in ITA No./137/Bang/2015, CNO IT Services (India) P. Ltd in ITA No.336/Hyd/2015, M/s. Lionbridge Technologies P. Ltd in ITA No.7415/Mum/2014, Obopay Mobile Technology India P. Ltd (46 ITR(T) 42, Parexel International (India) P. Ltd ( .....

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TPO to exclude this company from comparables. 7.5 In Spry Resources India Pvt. Ltd the ld. TPO worked out margin at 33.00. The company would be undertaken maintenance projects for the development projects concluded in the previous year. Company to focus on e-governance. However, profit and loss account does not show any revenue from maintenance projects. As per revenue recognition policy, the company has revenue from sale of software. However, no further segmental is available to show sale of so .....

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ed out by the assessee. Since there is no segmental income and company is not functionally in comparables, we are inclined to accept the contention of the ld. Authorised Representative and company should be excluded from the comparables. Accordingly, we direct the ld. TPO to exclude the company from comparables. 7.7 In ICRA Techno Analytics Ltd, the ld. TPO worked out margin at 28.90. The Company is engaged in diverse activities such, as income from sales software development & consultancy, .....

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nd diversified into domain of business analytics and business processing outsourcing and earned its Revenue from software development, consultancy, licensing, sub-licensing and others. As per the Annual report, the Revenue recognition from sale is recognized as and when delivery of branded software is made booked at net trade discount and in respect of development and consultancy, licensing and sub-licensing fee. The Revenue is recognized to the extent of services are performed. However, there i .....

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ompanies which earned revenues from predominately onsite services RS Software is rejected based on the Onsite Revenue filter. Even Taksheel Solutions Limited earns significant margins from onsite services. 7.10 We heard the rival submissions, perused the material on record. We found that the comparable company having compressive IT solutions by providing software development services for the enterprises engaged in financial services. The arguments of the ld. Authorised Representative that it has .....

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(India) P.Ltd in ITA No.94/PN/2014, Barclays Technologies Centre India Pvt. Ltd in ITA No.2279/PN/2012 and Emptoris Technologies India Pvt. Ltd in ITA No.436/PN/2013. 7.12 We heard the rival submissions, perused the material on record. The comparable company should have similar services and activity of the assessee whereas the comparable company is the business of IT consulting education based on internet and infrastructure management working on remote net management data backup as per Annual r .....

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case of Quintegra Solutions Ltd the assessee has margin (9.42) and was rejected on the basis that there is persistent loss. However, the same is not factually correct and relied on the judicial decisions of Goldman Sachs (India) Securities Pvt. Ltd in ITA No.7724/Mum/2011, Brigade Global Services P. Ltd 28 ITR (Trib) 411 and Bobst India P. Ltd 63 taxmann.com 339 7.14 We heard the rival submissions, perused the material on record and judicial decisions cited. The comparable company was rejected a .....

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