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M/s. CNO It Services (India) Private Limited, Hyderabad Versus Dy. Commissioner of Income -tax Circle 1 (2) , Hyderabad

2016 (2) TMI 931 - ITAT HYDERABAD

Transfer pricing adjustment - comparable selection - Held that:- In view of the matter, following the decision of this Tribunal in the case of Pegasystems Worldwide India Pvt. Ltd. Hyderabad [2015 (10) TMI 2495 - ITAT HYDERABAD] we accept the contentions of the assessee in its appeal and direct the Assessing Officer/TPO to redetermine the transfer pricing adjustment, if any, warranted, after excluding the above three comparables [ E-Infochips Bangalore ltd., Kals information Systems ltd. and Tat .....

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directions issued by the Dispute Resolution Panel, Hyderabad. 2. The only issue involved in this appeal relates to the addition of ₹ 1,11,51,669 made by the Assessing Officer on account of Transfer Pricing Adjustment in respect of the international transactions of the assessee, and more specifically, the grievance of the assessee is against the inclusion of the following three companies in the list of comparables selected by the TPO, which has been upheld by the Dispute Resolution Panel - .....

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ording to which the assessee had international transactions with its associated enterprises. The Assessing Officer therefore, made a reference to the Transfer Pricing Officer as per the provisions of S.92CA for determination of Arm s Length Price. The Transfer Pricing Officer, in the course of his transfer pricing study selected eighteen comparables and arrived at the Arithmetic Mean Margin of OP/TC of the comparables post working capital adjustment at 20.59% in the following manner- Name of the .....

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14.09 13. Infosys Technology ltd. - 43.86 14. L& T Infotech Ltd. - 20.78 15. Mindtree Ltd (Seg) - 18.53 16. E infochips Bangalore Ltd., - 66.28 17. Kals Information Systems Ltd (Seg) - 19.01 18. Tata Elxsi Ltd (Seg) - 15.66 Arithmetic mean margin of comparables - 20.59 Since the margin of difference between profit margin declared by the assessee and the Arithmetic Mean Margin of the comparable companies selected by the Transfer Pricing Officer was more than 5%, applying the above Arithmetic .....

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esolution Panel. The assessee s objection before the Dispute Resolution Panel was with regard to the inclusion of eight out of the eighteen comparable companies selected by the Transfer Pricing Officer, which are against sl. Nos. 11 to 18 above. The Dispute Resolution Panel, vide its directions dated 28.11.2014, accepted the objections of the assessee with regard to five comparables listed against Sl.Nos.11 to15 above, but rejected the pleas of the assessee for exclusion of three other comparabl .....

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lower authorities and other material on record. As noted hereinabove, the only grievance of the assessee in this appeal is against the inclusion of the following companies in the list of comparables, for the purposes of determining the Arm s Length Price. (a) E-Infochips Bangalore ltd. (b) Kals information Systems ltd. (c) Tata Elxsi Ltd.(Seg) Admittedly, comparable nature of the above three companies in similar circumstances, has come up for consideration before this Tribunal in the case of Pe .....

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e (vide page 34 and 35 of the order of TPO). Assessee objected that the information for FY. 2009-10 was not available in public domain. It was further contended that company is functionally different and is having two different segments i.e., software development services and ITES. Company offers broad portfolio of services comprising new products, product development, product sustenance and maintenance, Product Qualitative Analysis (QA) and independent testing hardware and software design etc. .....

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on the annual report of FY. 2010-11 and used the information applicable to FY. 2009-10 from that report, as the information for FY. 2009-10 was not available in public domain. It is also submitted that this company was never selected either by TPO in earlier year or in later year. It was also submitted that profitability varies from year to year and in this year, there was arbnormally very high margin, the reasons of which could not be analysed in the absence of annual report. It was further con .....

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t company has merged in 2012 with another company and it will be difficult to obtain further information/segmental information about the company now. In view of its fluctuating profits over the years, this company was not selected as a comparable earlier or in later years by Revenue. Since the disclosure in annual report is common, Assessee relied on the decision of Ahmadabad Bench of ITAT in the case of All Scrips (India) Private Ltd., in ITA No. 771/AHD/2014 for AY. 2009-10, wherein this compa .....

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cribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available ……………………..Considering the aforesaid facts, we are of the view that the aforesaid two companies needs to be excluded while working out the comparability analysis and therefore uphold the plea of the Assessee in excluding the margins of the aforesaid 2 companies . 8.2. Ld. DR, however, referred to the extracts made by TPO in the orde .....

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segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year s annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operati .....

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o exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard. Kals Information Systems Ltd : 10. Assessee objected to the above company before TPO stating that the above said company is functionally different as it is engaged in the development of software and software products. It has inventories equivalent to 27% of the revenue. TPO however rejected Assessee s contentions stating that company classified itself as pure software development serv .....

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ced by Assessee, the company classified itself as the company engaged in development of software and software products since its inception . The company consisting of STPI unit engaged in development of software and software products and a training centre engaged in training of software professionals on on-line projects. This indicates that company is engaged in development of software and products and its inventory also indicates that Assessee has been using its readymade libraries for sales. T .....

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ed to exclude the company. Tata Elxsi Ltd (Seg): 12. Before TPO, Assessee contended that the above said company is functionally different as it specialized in embedded software development technology. It was also objected before TPO that in earlier year this company has clearly stated that it cannot be compared to any other software services company due to complex nature of its business. Assessee relied on the decisions of ITAT in the case of Conexant Systems India Pvt. Ltd. (ITA No.1429/Hyd/201 .....

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s the objection of Assessee that above company is predominantly into product design services, Innovation Design Engineering and visual computing labs division which are specialized services. He referred to the order of ITAT in AY. 2009-10 in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this company was rejected on the reason that it is engaged in multiple segments. There is no break-up in the annual report and data on which margin from software services activity .....

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