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2015 (11) TMI 1666 - ITAT BANGALORE

2015 (11) TMI 1666 - ITAT BANGALORE - TMI - TPA - selection of comparable - Held that:- Assessee, a company engaged in the business of provision of software development services of electronic integrated circuits and firmware development of integrated circuits to its parent company thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. - Risk adjustment - Held that:- In principle, the assessee may be granted risk adjustment, if so req .....

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isk adjustment to be allowed, if any, in accordance with law. - TDS u/s 195 - Disallowance of Project Specific Costs under section 40(a)(ia) - Held that:- In the course of hearings before us, the learned Authorised Representative for the assessee fairly conceded that this issue is covered against the assessee and in favour of Revenue by the decision of the Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. (2011 (10) TMI 195 - KARNATAKA HIGH COURT), relied on by the .....

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dvance Tax Credit - Held that:- We find this Ground was raised before the DRP and the DRP had directed the Assessing Officer to examine the claim of the assessee and allow as per the existing system of giving credit for prepaid taxes. In view of the above, the Assessing Officer is directed to comply with the directions of the DRP and give credit for the pre-paid taxes paid by the assessee as per law. - Depreciation Adjustment - Held that:- We admit the additional ground raised for grant of d .....

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issues on merits after affording the assessee adequate opportunity of being heard and to make submissions and file details in this regard and to duly consider the same while deciding the issue. - I.T. (T.P) A. No.1670/Bang/2012 S.P. No.120/Bang/2015 - Dated:- 6-11-2015 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER Appellant By : Shri K.R. Vasudevan, Advocate. Respondent By : Shri D. Sudhakara Reddy, CIT-III (D.R.) O R D E R Per Shri Jason P. Boaz, A.M. : T .....

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siness of provision of software development services of electronic integrated circuits and firmware development of integrated circuits to its parent company, Infineon Technologies Asia Pacific Pte, Singapore, filed its return of income for Assessment Year 2008-09 on 30.9.2008 declaring total income of ₹ 21,29,98,270. The case was taken up for scrutiny. In the period under consideration, the assessee had reported the following international transactions :- Software Research & Developmen .....

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om the CIT -I, Bangalore. The TPO vide order under Section 92CA of the Act dt.22.9.2011 proposed a T.P. Adjustment of ₹ 26,13,69,735 to the ALP of the assessee's international transactions in respect of the software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment under Section 143(3) rws 144C of the Act dt.30.11.2011 determining the income of the assessee at ₹ 58,69,63,275 which included, inter alia, the proposed T.P. A .....

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3(3) rws 144C of the Act dt.29.10.2012 assessing the taxable income of the assessee at ₹ 58,69,63,275 by making the following additions/disallowances :- (i) T.P. Adjustment : Rs.26,13,69,735. (ii) Project Specific Cost : Rs.11,25,95,270. 3.1 Aggrieved by this final order of assessment for Assessment Year 2008-09 dt.29.10.2012, the assessee is in appeal before this Tribunal. Before proceeding to deal with the grounds of appeal, the brief facts relating to the Transfer Pricing issue is summa .....

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e (*) 149,50,24,153 2,17,85,857 Operating Cost (**) 142,18,35,901 1,99,87,025 Operating Profit 7,31,88,252 17,98,832 OP Margin / Cost 5.14% 9.00% 3.3 The assessee conducted a T.P. Study for the international transactions adopting TNMM as the Most Appropriate Method ( MAM ). Based on the study conducted and the comparability analysis carried out, the assessee selected a set of 18 comparable companies to the assessee with a Mean Margin of 8.98%. As the margin earned by the assessee with its Associ .....

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as under :- Sl.No. Name of the Company OP/TC % 1. Avani Cincom Technologies. 25.62 2. Bodhtree Consulting Ltd. 18.72 3. Celestial Biolabs. 87.94 4. e-zest Solutions Ltd. 29.81 5. Flextronics (Aricent) 7.86 6. iGAte Global Solution Ltd. 13.99 7. Infosys 40.37 8. Kals Information Systems Ltd. (Seg.) 41.94 9. LGS Global Ltd. 27.52 10. Mindtree Ltd. (Seg.) 16.41 11. Persistent Systems Ltd. 20.31 12. Quintegra Solution Ltd. 21.74 13. R Systems International (Seg.) 15.30 14. R S Software (India) Ltd. .....

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:- Particulars. Amount (Rs.) Arm s Length Mean Margin on cost 23.65% Less : Working Capital Adjustment 0.12% Adjusted Mean Margin 23.53% Operating Cost 142,18,35,901 ALP @ 123.53% of OP Cost 1,75,63,93,888 Price recovered 1,49,50,24,153 Shortfall being adjustment u/s.92CA 26,13,69,735 Based on the above computation, the TPO proposed an adjustment of ₹ 26,13,69,735 to the ALP of the assessee's international transactions with its AEs, which was incorporated in the final order of assessm .....

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her. 1. The learned Assessing Officer ( AO ) and the learned Additional Commissioner of Income Tax (Transfer Pricing - VI), Bangalore ( Transfer Pricing Officer or TPO ) grossly erred in law and facts of the case in determining the Arm s Length Price ( ALP ) of the international transaction of the Appellant and thereby making an adjustment of ₹ 261,369,735/- with respect to the software development services rendered by the tax payer. 2. The learned AO and TPO ought to have accepted the arm .....

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nd the learned AO erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm s length price. 6. On the facts and circumstances of the case, the learned AO and the learned TPO erred in rejecting the Transfer Pricing ( TP ) documentation without appreciating the contentions, arguments, and evidentiary data put forward by the Appellant during the course of the proceedings before them, and in doing so have gros .....

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ction 133(6) of the Incometax Act, 1961 ( the Act ), which in many instances are inconsistent with the data disclosed in audited reports. In doing so the learned TPO has erred in complying with the principles of natural justice. 6.4 in considering 25 percent as the threshold limit for the Related Party Transactions filter as this number is an arbitrary number that has been adopted without any judicial precedence or reasonable basis. 6.5 in rejecting the upper limit for sales turnover filter prop .....

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dia Technologies India Pvt. Ltd. (reference: ITA No. 3856(Del)/2010). 6.7 in accepting companies engaged in the provision of software product development like Avani Cimcon Technologies Limited, KALS Information Systems Limited, Persistent Systems Limited, Quintegra Solution Limited, Sasken Communication Technologies Limited, R Systems International Limited and Thirdware Solution Limited which are functionally not comparable to the Appellant s business. 6.8 in accepting Tata Elxsi Limited as a co .....

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abnormal/fluctuating profit margins. In doing so the learned AO have disregarded the various jurisdictional ITAT rulings in case of SAP LABS India Pvt. Ltd. Vs. ACIT (reference ITA. No. 398/Bang/2008), E-Gain Communication Private Limited (reference: ITA No. 1685/PN/07 - Pune); 6.11in accepting companies like Flextronics Software Systems Limited, Quintegra Solutions Limited, Sasken Communications Technologies Limited, Wipro Limited and R Systems International Limited without taking into consider .....

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TPO erred in rejecting Aarman Software Private Limited and VMF Soft Tech Limited. 6.14in applying the onsite filter for selection of software comparables with the use of the data obtained under section 133(6) of the Act, is not economically valid. In doing so, the learned TPO erred in rejecting companies such as Akshay Software Technologies Limited, Prithvi Information Solutions Limited, Silverline Technologies Limited, Zylog Systems Limited and VJIL Consulting Limited. 6.15in not maintaining co .....

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tegra Solutions Limited Tata Elxsi Limited which owns intangible assets. 6.17in accepting companies like Igate global solutions Limited, Thirdware solution Limited, E-Zest Solutions Limited and Wipro limited where segmental data pertaining to software development services is not available. 7. The learned TPO and the learned AO erred in disregarding the use of multiple year data, and ought to have accepted the use of contemporaneous data due to non-availability of current year data in the public .....

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y Infineon Technologies AG Germany, the ultimate parent company of the appellant, from the vendors as a standard off-the-shelf product and are not transferred to the appellant company. The appellant company only uses the licenses owned by Infineon Technologies AG, Germany. The learned AO ought to have appreciated that the payments made by the appellant company to Infineon Technologies AG, Germany for usage of EDA software tools is towards reimbursement of costs incurred by Infineon Technologies .....

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software. The learned AO erred in holding that sale of software is to be construed as royalty . 9. Advance tax credit of ₹ 15,000,000/-. The learned AO has erred in not giving advance tax credit of ₹ 15,000,000/- thereby resulting in excess 234B and 234C interest being charged. 4.2 The assessee has also raised the following additional grounds :- 4.2.1 I. Vide letter dt.12.1.2015, the assessee has raised the additional grounds on the following issues :- i) Ground No.12 : Lucid Softwar .....

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see submitted a chart, explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO in the list of comparable companies to the assessee. The learned Authorised Representative also submitted that he would put forth submissions only on the comparability of the individual companies selected by the TPO in the final set of comparables and also on the inclusion of two of the companies selected by the assessee but rejected by the TPO. 5.2 .....

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Ltd. v. Addl. Ground raised in respect of exclusion of Lucid Software Ltd. vi. Addl. Ground for grant of depreciation adjustment. vii. Addl. Grounds on computation of correct margin and working capital adjustment margin. 5.3 Consequently, since all the other grounds, at S.Nos.1, 2, 5, 6.1 to 6.4 6.14 to 6.17 and 7 relating to T.P. Issues are not being pressed, the same are rendered infructuous and accordingly dismissed. 5.4 In the course of proceedings before us, the learned Authorised Represen .....

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e cited case (supra). The learned Authorised Representative further submitted that in respect of the exclusion of the company, Bodhtree Consulting Ltd., the assessee places reliance on the decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems India Pvt. Ltd., in IT(TP)A No.27/Bang/2014 dt.14.8.2014. 5.5 At the outset, it needs to be examined whether the judicial pronouncements relied on by the assessee are comparable, on facts, to the assessee in the case on hand. As po .....

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the TPO are exactly the same in these cases. In view of the fact that the TPO has adopted similar comparability analysis and considered the same set of comparable companies in these companies, we find merit in the contentions of the learned Authorised Representative that the decision rendered in the cases (cited supra) can be relied upon in deciding the comparability of the companies in the assessee's case also. Grounds 6.5 to 6.6, 6.16 to 6.17 Exclusion of companies from list of comparables .....

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nfosys Technologies Ltd. 6) KALS Information System (Seg.) 7) Persistent Systems Ltd. 8) Quintegra Solutions Ltd. 9) Tata Elxsi Ltd. (Seg.) 10) Thirdware Solutions Ltd. 11) Wipro Ltd. 12) Softsol India Ltd. 13) Lucid Software Ltd. 6.2 We have heard both parties and perused the material on record. We find that the following were the relevant observations and findings of the co-ordinate bench of this Tribunal in the case of Sonus Networks India Pvt. Ltd., in IT(TP)A No.1567/Bang/2012 dt.14.5.2015 .....

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objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on i .....

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ny are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions : i) Trilogy E-Business Software India Pvt. Ltd. V DCIT .....

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2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that :- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like DX Change, CARMA, et .....

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hat this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to dem .....

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8, the year for which the decision in case of Trilogy E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applic .....

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demonstrated that the facts of Trilogy E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make .....

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ason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in .....

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Assessment Year 2007-08 (supra) and in other cases like Trilogy E-Business Software India Pvt. Ltd. (supra) are applicable to the year under consideration as well. 7.5 Per contra, the learned Departmental Representative supported the order of the TPO / DRP for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included th .....

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as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on .....

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year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 9. Celestial Biolabs Ltd. 9.1 This comparable was selected by the TPO for inclusion in the final l .....

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ost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of biotechnology, pharmace .....

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d earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustments, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the assessee in this regard. (iv) The rejection / exclusio .....

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ny cannot be considered for the purpose of comparability in the instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Ye .....

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arity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers fro .....

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see that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of th .....

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ds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable .....

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the co-ordinate bench of this Tribunal in the assessee's own case. This company has been held to be different from a software development company in the decision of the Tribunal in the case of Bindview India Pvt. Ltd. V DCIT in ITA No.1386/PN/2010. (iii) The rejection of this company as a comparable has been upheld by co-ordinate benches of the Tribunal in the case of - (a) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011). (b) LG Soft India Pvt. Ltd. (IT (TP) A No.112/Bang .....

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f the Annual Report of this company. (v) This company is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. Virtual Insure and La-Vision and b) The Training segment which does not have any product revenues. 1 .....

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emain the same for the year under consideration also and the same is evident from the details culled out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by th .....

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f co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the coordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of compara .....

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s that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software developm .....

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oes not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leade .....

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LAY , a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margi .....

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ding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold .....

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thorised 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 Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity In .....

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is 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 purposes and for computing the margins, which is in contradiction to the TPO s own filter of rejecting companies with conso .....

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on 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 consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropri .....

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ssessee 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 the year under consideration. 13. Tata Elxsi Ltd. 13.1 This company was a comparable selected by the TPO. Before the .....

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software development and services segment namely - a) product design, (b) innovation design engineering and (c) visual computing 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. .....

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not to software services provided by the assessee. (iv) Tata Elxsi Ltd. invests substantial funds in research and development 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 th .....

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ment software development services relates to design services and are not similar to software development services performed by the assessee. 13.4.2 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 .....

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product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining 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 .....

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mpany is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this 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 inclu .....

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the details available on the company s website which should be considered while evaluating the company s functional profile. It is also submitted by the learned 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 .....

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only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined 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 deve .....

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d from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion 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 comparabl .....

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lopment services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04-ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable 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 aforecited decision of the Tribunal (supra), this company ought to be omitted from the .....

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product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has 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 .....

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entative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service 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 th .....

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n i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences 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 .....

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idered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on 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 t .....

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es pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the coordinate 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. 17. Persistent Systems Ltd. 17.1.1 This compan .....

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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 qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this co .....

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endors 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 company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consider .....

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erial 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 assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmenta .....

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lso 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's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this c .....

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) 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), proprietary software products and consultancy services in IT on various platforms and technologies. (iii) This company is also engaged in research and development activities which resulted in the creation of Intel .....

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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 is evidenced from the company s Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter ali .....

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e 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 the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having app .....

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nual 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 list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutio .....

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objections on the ground that as per the company s reply to the notice under section 133(6) of the Act, the company has categorized itself as a pure software developer and therefore included this company as a comparable as the assessee was also a provider of software development services. Before us, in addition to the plea that the company was functionally different, the assessee submitted that this company was excluded from the list of comparables by the order of the coordinate bench of this Tr .....

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les as this company was a pure software development service provider like the assessee. 19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 has excluded this company from the set of comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer. .....

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to exclude the aforesaid 12 companies from the list of comparables to the assessee in the case on hand. Additional Ground of Appeal. 7. Bodhtree Consulting Ltd. 7.1 As regards Bodhtree Consulting Ltd., the learned Authorised Representative for the assessee has submitted that, for exclusion of this company from the list of comparables to the assessee in the case on hand, reliance is placed on the decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd., in .....

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e to companies engaged in software development services. 7.2 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited by the assessee. We find that the coordinate bench of this Tribunal, in the case of M/s. CISCO Systems India Pvt. Ltd. (supra) has excluded this company from the list of comparables to those engaged in software development services and at para 26.1 of the order has held as under :- 26.1 Bodhtree C .....

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Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consulta .....

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h of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. 7.3 Following the above cited decision of the co-ordinate bench in the case of CISCO .....

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) VMF Softech Ltd. 8.2 It was submitted that the TPO had rejected the above two companies only on the ground that the export sales are not more than 25% of the sales during the year under consideration. The assessee, however, submits that the export sales of these two companies are more than the 25% limit specified in the filter adopted by the TPO and therefore these two companies have been wrongly rejected as comparables by the TPO. 8.3 We have heard the rival submissions of both the learned Au .....

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fore, prima facie, it would appear that the TPO has rejected the inclusion of this company as a comparable on a wrong appraisal of facts. 8.3.2 In the case of VMS Softech Ltd. also, the TPO has rejected the inclusion of this company as a comparable on the ground that this company fails the export sales filter of 25% applied by the TPO. However, from the extract of the Annual Report of this company for the period under consideration, submitted by the assessee, it appears that about 97.35% of the .....

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e. Needless to add, that the assessee shall be provided adequate opportunity of being heard and make submissions / file details required in this regard, which shall be considered while deciding the issue of comparability of these two companies. It is ordered accordingly. Consequently, Ground No.6.13 is treated as allowed for statistical purposes. 9. Grounds 3 and 4 : Risk Adjustment. 9.1 The assessee contends that it is a low risk service provider whereas the comparable companies chosen by the T .....

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010 and Bearing Point Business Consulting Pvt. Ltd. in ITA No.1124/Bang/2011. 9.2 We find that the co-ordinate bench of this Tribunal in the cases of Intellinet Technologies India Pvt. Ltd. (supra) and Bearing Point Business Consulting Pvt. Ltd. (supra) have held that, in principle, risk adjustment must be granted, if warranted in the facts of the case, for bringing the comparables on par with the assessee company. Following the above decision and of the co-ordinate bench (supra), we also hold t .....

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ng with all the relevant material before deciding on the percentage of risk adjustment to be allowed, if any, in accordance with law. It is ordered accordingly. Consequently, Ground Nos.3 & 4 are treated as allowed for statistical purposes. CORPORATE TAX ISSUES. 10. Ground No.6: Disallowance of Project Specific Cost. 10.1 This Ground is in respect of the disallowance of project specific costs amounting to ₹ 11,25,95,270 u/s.40(a)(i) of the Act. 10.2 In the course of assessment proceedi .....

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hers (Kar) in ITA No.2808 of 2005 dt.15.10.2011 and to which case the assessee was also a party (ITA No.1264 & 1265/06). In this view of the matter, the Assessing Officer made the disallowance of ₹ 11,25,95,270 under Section 40(a)(i) of the Act. On appeal, the DRP upheld the decision of the Assessing Officer who then made the disallowance in the final order of assessment. 10.3 It is against these findings of the authorities below, that the assessee is before us in this appeal. In the c .....

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ronics Co. Ltd. (supra) which has also been rendered in the assessee's case, we uphold the decision of the Assessing Officer. Consequently, we dismiss Ground No.8 raised by the assessee. 11. Ground No.9 : Advance Tax Credit. 11.1 In this Ground, the assessee contends that the Assessing Officer has failed to give credit for advance tax paid amounting to ₹ 1,50,00,000, due to which interest under Section 234B and 234C of the Act has been excessively charged. From a perusal of the record, .....

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1 The assessee has submitted that the depreciation cost as a percentage of the cost of the assessee during the financial year is significantly different from that of the comparable companies. Therefore, in order to achieve reliable comparability, the margins of the comparable companies should be adjusted for differences in depreciation cost of the comparable companies and the tested party. In support of the above contention the learned Authorised Representative placed reliance on the decision of .....

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r the first time as has been held by the co-ordinate bench of this Tribunal in the case of 24/7 Customer.com Pvt. Ltd. (supra), the relevant portion of which is extracted hereunder :- 19.1 Additional ground of appeal The assessee vide letter dt.10.9.2012 filed an application seeking leave to urge additional grounds under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 which are as under : Ground 1 : Transfer Pricing It is most humbly prayed that this Hon'ble Tribunal to permit the .....

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across the comparables and the appellant. - Considering the above fact, to achieve reliable comparability, the margins of the comparable companies post the adjustment of the depreciation should be considered. 19.2 The assessee in the grounds raised sought adjustment towards depreciation on the ground that the depreciation cost as a percentage of the gross block of the assessee was 25% as against 10% for the comparable and hence this difference needs to be adjusted for comparability. During the .....

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ed to be an afterthought after the CIT (Appeals) has confirmed the adjustments made by the TPO. The learned Departmental Representative submitted that the assessee has not explained as to why this claim of depreciation is being submitted now; why it is necessary to accept the same; why this claim was not raised earlier; computation of quantum, etc. In the absence of these details, such an additional ground would have no meaning and not being maintainable ought to be dismissed summarily. 19.4 We .....

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tested party and the comparables. An adjustment for difference in depreciation is a valid principle for comparability, but whether this case entails such an adjustment has to be examined in the light of the particular facts of the case. Hence, the additional ground raised by the assessee is as much as issue of fact as it is of principle. 19.5 Before us, the assessee has not been able to adduce any reason as to why this issue was not raised before the authorities below. It gives credence to the v .....

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hat the assessee has compared the depreciation as a percentage of the gross block of the individual cases and not as a percentage to operating cost. 19.7 No case has been made out by the assessee that the difference in depreciation is due to any reason like capacity utilization, etc. The difference in depreciation could be due to many reasons as different companies have their own accounting problems in the matter of fixed assets and depreciation on the basis of technical estimates made of useful .....

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However, at the end of the day, the depreciation off sets each by itself. 19.8 In the interest of equity and natural justice, we feel constrained to admit the additional ground raised by the assessee on the issue of depreciation. However, mere claim for an adjustment will serve no purpose unless it is backed by proper details. The additional ground states that the depreciation of the assessee is a ratio of its gross block of 25% as against 10% of the comparable companies. The assessee has not st .....

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as raised by the assessee in the additional grounds (supra) to the file of the Assessing Officer / TPO with direction to examine and consider the claim for adjustment towards depreciation in the light of our observations from paras 19.3 to 19.8 of this order and to dispose the matter expeditiously after affording adequate opportunity of being heard to the assessee. It is ordered accordingly. 12.3 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 24/7 Custo .....

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