TMI Blog2016 (8) TMI 1231X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting to ₹ 3,65,79,234/-. However, this order was revised by the Addl. DIT (TP) u/s. 92CA(5), wherein they have determined the revised assessment at ₹ 1,66,75,628/-. The Assessing Officer (AO) accordingly completed the assessment order. 2. Before the Ld. CIT(A), assessee has contested various filters, parameters and selection of comparable companies. Ld. CIT(A) after considering them in detail, however, found that there is no reason to interfere with the order of the Addl. DIT(TP) and accordingly, he rejected the contentions and TP adjustments. 3. Assessee had raised the following two grounds in its appeal: 2. The A.O. erred in adding an amount of ₹ 1,66,75,628/- as adjustment u/s. 92CA(3) of the Income Tax Act. 3. The TPO erred in determining the adjustment u/s. 92CA(3) at ₹ 1,66,75,628/- when in reality there was no such variance in the cross border transactions by the assessee with its associated enterprises . 4. Ld. Counsel at the outset submitted that TPO has selected 26 companies as comparables and out of them assessee has no objection for the first twelve companies. With regard to the balance 14 companies, the comparables sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.55 52.59% Tata Mc-graw Four Soft Triology NTT Data 154 ITD 109 149 ITD 732 140 ITD 540 157 ITD 897 15 Celestial Labs Ltd 14.13 58.35% Curram Triology 149 ITD 458 140 ITD 540 16 Flextronics Software Systems Ltd (Seg) 848.66 25.31% Intoto NTT Data 146 ITD 360 157 ITD 897 17 Infosys Technologies Ltd 13,149.0 40.30% Tata Mc-graw Four Soft Curram 154 ITD 109 149 ITD 732 149 ITD 458 18 Ishir Infotech Ltd 7.42 30.12% Four Soft NTT Data 149 ITD 732 157 ITD 897 19 KALS Information Systems Ltd (Seg) 2.00 30.55% Tata Mc-graw App Labs NTT Data 154 ITD 109 149 ITD 99 157 ITD 897 20 LGS Global Ltd (Lanco Global Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale (Rs. Cr.) OP to Total Cost % 1. Datamatics Ltd 54.51 1.38% 2. E-Zest Solutions Ltd 6.26 36.12% 3. Geometric Ltd (Seg) 158.36 10.71% 4. Helios Matheson Information Technology Ltd 178.63 36.63% 5. IGate Global Solutions Ltd 747.27 7.49% 6. Mediasoft Solutions Ltd 1.85 3.66% 7. Mindtree Ltd 590.35 16.90% 8. Quintegra Solutions Ltd 62.72 12.56% 9. R S Software (India) Ltd 101.04 13.47% 10 R Systems International Ltd (Seg) 112.01 15.07% 11 Sasken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7] in ITA No. 2190/Hyd/2011 has been extracted which has excluded the following comparables: 1. Avani Cimcon Technologies Ltd; 2. Infosys Technologies Ltd; 3. Ishir Infotech Ltd; 4. Ludic Software Limited; 5. Megasoft Ltd; 6. Tata Elxsi Limited; 7. Wipro Limited; 8. Accel Transmatic Ltd; 9. Kals Information Systems Limited; 10. Flextronics Software Limited; 11. Helios Matheson Information Technology Ltd The relevant order pertaining to the above comparables is as under: 5. We have heard the learned counsel and the Learned Departmental Representative. Learned Departmental Representative also placed on record written objections on the contentions raised by the assessee and we also perused the paper-book placed on record running to 809 pages. 6. At the outset, it has been fairly admitted that the comparables objected to in the list from Sl. Nos. 14 to 24 were already considered by the coordinate bench of this Tribunal in the case of United Online Software Development India Pvt. Ltd. in ITA No.1658/Hyd/2011 vide its order dated 24.9.,2015 for assessment year 2007-08. Learned counsel submitted that the assessee has raised the same objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 dated 30/08/2013) after following some other decisions of the Tribunal has held this company cannot be treated as comparable as this company is also into product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with Assessee. As the aforesaid decision of the Coordinate Bench pertained to the same assessment year i.e. A.Y. 2007-08, following the same, we hold that this company cannot be treated as comparable to Assessee. Other cases considered the same comparable and rejected are as under: a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.1978/H2011 c) Intoto Software India P. Ltd. ITA.2102/H/2010 d) Telcordia Technologies India P. Ltd. ITA.7821/Mum/2011 e) Triology E-Business Solutions ITA.No.1054/Bang /2011 f) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from objecting to the selection of that comparable in proceedings before higher forum. In this context, the learned AR relied upon the Income-tax Appellate Tribunal Special Bench decision in case of Quark Systems, 4 ITR (Trib) 606. 7.2.3. We have considered the submissions of the parties and perused the materials on record. On considering the same, we are of the view that this company cannot be considered as comparable to Assessee due to various factors such as its size, turnover, brand value, scale of operation, diversified activities and owning of intangibles. As can be seen from the TP order, the turnovers of Infosys Technologies Limited during the year under consideration are ₹ 13,149 crores as against ₹ 42 crores of Assessee. Though it is a fact that Assessee in the TP documentation, has selected Infosys Technologies Ltd. as comparable but that cannot prevent Assessee from objecting to the aforesaid company being selected as comparable, if there are valid reasons for doing so. In this context, the contention of the learned AR that Assessee has selected Infosys Limited on the basis of three years financial data, whereas the TPO considered only the current y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des Benz Research Development ITA.No.1222/Bang/2011 g) CSR India P. Ltd. ITA.No.1119/Bang/2011 h) First Advantage ITA.No.1086/Bang/2012 i) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Respectfully following the aforesaid decisions of the co-ordinate bench, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. LUCID SOFTWARE LIMITED : 7.4. The main objection of assessee with regard to the aforesaid company is that it earns revenue both from product development as well as software services for which segmental data is not available. In support of such contention, the learned AR has relied upon the decision of co-ordinate bench in the case M/s Virtusa (India) Pvt. Ltd. (supra). On perusal of the order passed in case of M/s Virtusa (India) Pvt. Ltd. (supra), it is seen that the coordinate bench has excluded the aforesaid company accepting assessee s contention that segmental data in respect of sale of products and software services are not available. Further following cases also considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enz Research Development ITA.No.1222/Bang/2011 j) CSR India P. Ltd. ITA.No.1119/Bang/2011 k) First Advantage ITA.No.1086/Bang/2012 l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Respectfully following the aforesaid orders of co-ordinate benches, we direct the Assessing Officer /TPO to consider only the segmental margin of this company for the relevant assessment year for computing ALP. TATA ELXSI LIMITED : 7.6. Assessee has sought exclusion of the aforesaid company by placing reliance upon the information furnished by said company u/s 133(6) wherein the said company has admitted that it cannot be treated as comparable with any other software service provider due to complex nature of its business. However, while the TPO selected the aforesaid company by holding that the services provided are akin to software development services, the DRP, did not comment on the comparability of this company. The learned AR submitted that comparability of the aforesaid company was considered and analysed by different benches of the ITAT a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company being treated as comparable, the learned AR submitted that the TPO only on considering segmental details submitted by the said company for IT services, in response to notice issued u/s 133(6), has considered it as a comparable. It was submitted that the aforesaid company is a diversified company and discloses segmental information for IT services and products as one segment in its annual report. It was submitted that the TPO has not provided any other documents excepting segmental information obtained from TP report of Wipro, which is unaudited, manually corrected and unverified. It was submitted that Wipro is also considered to be a giant in its field assuming all the risks and cannot be compared to captive service provider like Assessee. To support his contentions with regard to non-comparability of the said company, he relied upon the following decisions : a) Telcordia Technologies India P. Ltd. ITA.No.7821/Mum/2011 b) Triniti Advances Software P. Ltd., ITA No. 1129/H/2005. c) M/s. Foursoft Limited (ITA.No.1903/H/2011) d) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted the contention of Assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd. Assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. ( i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system. ( ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development. ( iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/ CAM/BPO ( iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 7.8.1. On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with Assessee that the company was functionally different from Assessee company as it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. Assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by Assessee. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CSR India P. Ltd. ITA.No.1119/Bang/2011 g) First Advantage ITA.No.1086/Bang/2012 Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude the company from the list of comparables. 18. Similarly, as contended by the learned counsel for Assessee comparable nature of Flextronics Software Systems Ltd.(Seg) and Helio Matheson Information Tech Ltd., has been rejected by coordinate bench of the Tribunal in the case of M/s. Axsys Heathcare Ltd. vide order dated 28.5.2014 in ITA No.2076/Hyd/2011 for the assessment year 2007-08, for the following reasons- 14. After hearing rival contentions, we agree that the following comparables were excluded by the Coordinate Benches considering the similar facts and arguments raised before us: ........................... 3. High Turnover- functionally dissimilar: 6. FLEXITRONICS SOFTWARE LIMITED : As far as Flexitronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (g) LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) (h) Transwitch India Pvt. Ltd. (ITA No.948/Bang/2011) (i) Mercedes Benz Research Development (ITA No.1222/Bang- -/2011) (j) CSR India Pvt. Ltd. (ITA No.1119/Bang/2011) (k) First Advantage (ITA No.1086/Bang/2012) (l) HCL EAI Services Ltd. (ITA No.1348/Bang/2011) (m) Adaptee (India ) Pvt. Ltd.(ITA No.1801/Hyd/2011) 20. Respectfully following the consistent view taken by the Tribunal with regard to comparable nature of the above seven companies in similar matters and more particularly, the decision of the Tribunal in the case of Sumtotal Systems India Private Ltd. cited supra, including the decision rendered in assessee s own case for assessment year 2006-07, we allow ground No.7 of Assessee along with additional ground and direct the Assessing Officer to exclude the above eleven companies from the scope of comparability analysis. 6.1 Respectfully following the same, the Assessing Officer/Transfer Pricing Officer is directed to exclude the above companies form the list of comparable companies. Assessing Officer is directed to modify and redetermine the Arm s Length Price accordingly. Ground No.3(g) is ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rotected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06- 07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however conclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lutions Limited 3. Tata Elxsi Limited 4. Megasoft Limited 5. Lucid Software Limited 6. Kals Information systems Limited 7. Infosys Technologies Limited 8. Ishir Infotech Limited 9. Wipro Limited 10. Accel Transmatic Limited 11. Avani Syncom Technologies Limited 32. As far as first two companies are concerned, these two companies were also adopted as comparables in the assessee s own case for the AY. 2005-2006 and for the A.Y. 2005-2006 we have already held that these companies are functionally different and the Assessing Officer/TPO could not have taken these companies as comparable companies without making the suitable adjustments for the differences. Respectfully following our own decision, even dated, these two comparables are directed to be excluded from the list of comparables .. 8. In view of the above, respectfully following the findings of the Co-ordinate Bench, we direct the TPO to exclude the above comparables and to re-work out the ALP as per the provisions of the Act. 9. In the result, appeal is allowed for statistical purposes. Order pronounced in the open Court on 31st August, 2016 - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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