TMI Blog2016 (3) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... the same are to be excluded from total turnover. Following the Co-ordinate Bench decision in Tata Elxsi case [2011 (8) TMI 782 - KARNATAKA HIGH COURT ], the Ld.CIT(A) directed the same to be excluded from total turnover as well. Therefore, we uphold the same and reject Revenue’s grounds. - IT(TP)A No. 04/Bang/2012, IT(TP)A No.1388/Bang/2011 - - - Dated:- 18-3-2016 - SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI NARENDRA KUMAR CHOUDHURY, JUDICIAL MEMBER For The Assessee : Shri Suryanarayana, Advocate For The Revenue : Dr. G. Manoj Kumar, Addl.CIT ORDER Per B. Ramakotaiah, Accountant Member These cross appeals are by Assessee and Revenue against the order of Commissioner of Income Tax (Appeals) giving partial relief to Assessee. Both the parties are aggrieved and raised respective grounds. 2. We have heard the Learned Counsel and Ld. DR in detail and perused the Paper Book placed on record and various case law. 3. Assessee is part of McAfee group and renders software development services to McAfee Ireland Holdings Ltd., (AE). It is remunerated on cost+15% basis for the services it provides to its AE. During the FY. 2004-05 relevant to AY. 2005-06, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal are interrelated. Revenue is mainly aggrieved on the RPT filter adopted by Ld.CIT(A) at 0% where as the Co-ordinate Benches have been accepting upto 15% and in some orders up to 25%. Depending on the facts of each case in each year, the RPT filter is being used / approved. Learned Counsel fairly admitted that Co-ordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06- 2015 ( Sunquest) has followed the other decisions on the issue and held that in various other cases companies having related party transaction upto 15% of total revenues can be considered. Considering the above, it was contended that the Revenue s Ground No. 2 may have to be allowed and the companies rejected by Ld.CIT(A) has to be reconsidered. At the same time, Learned Counsel also submitted that the companies which are functionally not similar, having RPT of more than 15% and high turnover cases require reconsideration and made various submissions on the issue. Ld. DR also made submissions on the filters of RPT, turnover etc., and comparability of each of the companies. 8. As a general proposition, various filters are required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functional dissimilarity. Consequently, each of the comparables selected by TPO is analysed for the sake of convenience, keeping in mind the grounds raised by Assessee and Revenue on these. 10. The final list of 17 companies selected by TPO are as under: Sl No. Comparables selected by TPO NCP Margins as per TPO Order (%) (WC-Unadj) NCP Margins as per TPO Order (%) (WC Adj) 1. Bodhtree Consulting Ltd., 24.85 22.35 2. Lanco Global Systems Ltd., 13.65 9.51 3. Exensys Software Solutions Ltd., 70.68 62.85 4. Sankhya Infotech Ltd., 27.39 21.14 5. Sasken Network Systems Ltd., 16.64 14.02 6. Four Soft Ltd., 22.98 21.35 7. Thirdware Solution Ltd., 66.09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two comparables by various Coordinate Benches, we uphold the same. Bodhtree Consulting Ltd.,: 10.3. This company was retained by Ld.CIT(A) but Assessee objects on the basis of functionality. However, as seen from the orders of Co-ordinate Benches in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as well as DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013, Bodhtree Consulting Ltd., was accepted as a comparable. However, in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (Where one of us, AM is the author) has considered in detail and excluded the same for the following reasons: 1. Bodhtree Consulting Ltd. The learned counsel submitted that this company should be rejected under the following TPO s filters: Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of ₹ 133.90 lakhs, being 34.68% of the total turnover. Functionally di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information - SILICONTM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: 2. Activities The company as engaged in the business of development of Software Products Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956. The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 609I/Del/2011 for the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the Assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the Assessee company to bring them on par with the Assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables. 27. The learned counsel for the Assessee submitted before us that TATA Elxsi Ltd., a comparable company out of the 10 excluded by the CIT(A) by applying RPT filter and which gets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another Assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the Assessee. Keeping the Assessee s objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the Assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to Assessee services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Co-ordinate Benches also, the same was to be excluded. i. Intoto Software India Pvt. Ltd., ITA No. 1196/Hyd/2010; ii. Cordys Software India P. Ltd., ITA No. 1451/Hyd/2010 Geometric Software Solutions Company Ltd.,: 10.8. Even though this company was accepted as comparable in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) and Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) and was not objected to, we find that the Co-ordinate Bench at Banalore in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 has considered that this is in product devolopement. We have perused the TPO s order. In page 85 and 86 of the order, this comparable was analysed. TPO records that there are product sales to the extent of 18%. Segmental profits are not available. On assumptions, this company was retained. We are of the opinion that being a product based company, the same is not strictly comparable to a service company like Assessee. In the absence of segmental profit of service income, we have to exclude the same. Following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t out to the proviso to Section 92C(2), the Revenue contends that the deduction is not permissible. It relies on Co-ordinate Bench decision in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (at para 16)]. Learned Counsel contends that the standard deduction was granted correctly as the amendments will apply to the cases pending as on 01-04-2009 and this order was passed by AO on 28-11-2008. Even the explanation brought in later also does not apply to the case. He relied on the principles laid down in SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] and DCIT Vs. Synopsis India P. Ltd., in IT(TP)A No. 1107 1093/Bang/2011 dt. 08-10-2015 in support. 11.1. We have considered the rival contentions. The order of Ld.CIT(A) is in accordance with the provisons. The issue was analysed by the Coordinate Bench in the case of SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] (supra) at paras 61, 62, 63 64 as under: 61. The Central Board of Direct Taxes in its Circular No. 5 of 2010 dated June 3, 2010 [(2010) 324 ITR (St.) 293] has clarified that these new provisos are effecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent is more than 5 per cent and therefore, the Assessee will not get the marginal relief and the entire difference of 10 per cent will be added as the arm s length price adjustment. If the arm s length price determined by the Transfer Pricing Officer/Assessing Officer is 15 per cent and that of the Assessee is 11 per cent., the difference of 4 per cent is less than 5 per cent and in that case, the rate disclosed by the Assessee at 11 per cent shall be taken as the arm s length price. This is the position after the amendment. 64. In view of the above discussion, we find that the second limb of the proviso to section 92C(2) given an option to the Assessee to claim a marginal variance of 5 per cent as standard deduction. This ground of the Assessee is accepted and we hold that this benefit of deduction of 5 per cent has to be given to the Assessee, if the circumstances, so warrant . 11.2. Not only that, the explanation brought in by Finance Act, 2014 w.e.f. 01-04-2015 also specifies that the provisions of second proviso shall also be applicable to all assessments or reassessments proceedings pending before the AO as on the first day of October, 2009. The present proce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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