TMI Blog2016 (4) TMI 1250X X X X Extracts X X X X X X X X Extracts X X X X ..... ER PER S. RIFAUR RAHMAN, A.M.: This appeal is preferred by the assessee against the order passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short Act ) dated 12/10/2012 relating to AY 2008-09. 2. Brief facts of the case are, United Online Software Development (India) Pvt. Ltd., is a company engaged in the business of software development. The company provides software development and allied services in the area of Mail Plant, Web Mail platform and internet related software. This company in Hyderabad is registered as a 100% EoU under STPI Scheme of Govt. of India. This company is one of the group companies of United Online, US. This company was incorporated in 1999 under the Companies Act, 1956. The name of the company was changed from Juno India Pvt. Ltd. to United Online Software Development (India) Pvt. Ltd., with effect from 19/06/07. 2.1 During the relevant PY, the assessee company entered into international transaction with its AE, M/s United Online Inc., USA, for the provision of software development services and purchases as below: 1. Provision of software development services ₹ 21,69,90,55 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average 26.20 2.4 Assessee has selected Transaction Net Margin Method (TNMM) as the most appropriate method and also applied multiple year data to select the comparables. It had selected 23 comparables. Though, TPO has accepted the TNMM as the most appropriate method, he rejected the TP study of assessee and has made fresh TP study with data for the FY 2007-08. TPO had selected the above 19 comparables. 2.5 After comparing the average margins of the comparables to the financials of the assessee, the TPO computed the adjusted arm s length margin as under: Arithmetic Mean of PLI as arrived at by the TPO : 26.20% Add: Negative working capital adjustment : 0.27% Arm s length margin as arrived at by the TPO : 26.47% 2.6 Accordingly, the TPO who passed an order u/s 92CA(3) of the Act on 24/10/2011, recommended adjustment of ₹ 3,55,03,343/-. The same was incorporated by the AO in the draft assessment order. Assessee preferred a petition before the Dispute Resolution Panel (DR) raising va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information/ documents obtained by exercising powers u/ s 133(6) of the Act which are not available in public domain; and b) Further not providing any opportunity to Appellant to crossexamine the same. Use of additional filters 6. Inter-alia use of the following additional filters in undertaking the comparative analysis to reject comparable companies having: a) Onsite revenue in excess of 75%; b) Diminishing revenue/Loss making companies; and c) Different financial year-end. Selection of companies earning abnormal high margins 7. Selection of companies earning abnormal high margins as comparable to the Appellant; Selection of uncomparables 8. Not undertaking an objective comparative analysis and interaIia selecting the following companies as comparable to the software services of the Appellant: a) Infosys technologies Limited; b) Kals Information Systems Ltd; c) Tata Elxsi Limited (Seg); and d) Wipro Limited (Seg). 9. Not undertaking an objective comparative analysis and inter-alia rejecting the following comparable companies: a) Aditya Birla Minacs IT Services Ltd; b) Aditya Birla Minacs Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad Electricity Co. Ltd. 199 ITR 351 (Born) FB) 5. Mahalaxmi Textile Mills Ltd. 66 ITR 710 (SC) 6. Gilbert and Barker Manufacturing Co. 111 ITR 529 (Born) 7. CIT v. P.B. COrporation 266 ITR 548 (Guj) 8. CIT Vs. Pruthvi Brokers and Shareholders P. Ltd 349 ITR 336 (Born) 9. CIT Vs Gangappa Cables Ltd. 116 ITR 778 (A.P) 7. Since the additional grounds do not require enquiry into any new facts, we admit the same and proceed to adjudicate upon the additional grounds along with the main grounds originally raised in the appeal on the issue of inclusion of certain companies by the TPO. 8. The assessee has not pressed the grounds raised above except ground No. 8 and additional grounds. Therefore, all other grounds are rejected as not pressed. 9. The ld. AR objected to the selection of following comparables by the TPO. Therefore, we will deal with each of the company that was objected by the assessee. 1. Infosys Technologies Ltd. 1.1 The ld. AR objecting to the aforesaid company being treated as comparable, relied on the decision of the ITAT, Hyderabad in assessee s own case for AY 2007-08 and 2005-06. 1.2 The ITAT in AY 2007-08 vide ITA No. 1658/H/2011 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal is to the effect that Infosys Technologies Ltd. being a big company in all respects including the range of turnover is not a comparable to small companies which are captive service providers having considerably low turnover. In fact, the Hon ble Delhi Court in a judgement dated 19.7.2013 in the case of Agnity India Ltd. upheld the decision of ITAT Delhi Bench in excluding Infosys Technologies Ltd., as a comparable in view of its size. Therefore, keeping in tune with the consistent view of different Benches of the Tribunal in respect of the aforesaid company, we direct the AO/TPO to exclude the aforesaid company from the list of comparables. 1.4 The ld. AR also placed reliance on the following decisions: 1. Invensys Development Centre India Pvt. Ltd., 1692/H/12 AY 2008-09 2. 3DPLM Software Solutions Ltd, (TS-359-ITAT-2013(Bang)- TP) AY 2008-09. 3. Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 - AY 2008-09. 1.5 The ld. DR, on the other hand relied on the orders of revenue authorities. 1.6. After considering the submissions of both the parties and keeping in tune with the consistent view of different benches of the Tribunal in respect of the aforesaid, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d company is engaged in development of software products and services and is not comparable to software development services provided by Assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in ITA No.1658/Hyd/2011 1239/Hyd/2013 M/s. United Online Software Development ( India) Pvt. Ltd., Hyderabad 19 our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of Assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in publ ic domain could not have been used by the TPO, when the same is contrary to the annual report of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the decisions of the co- 14 ITA.No.1692/Hyd/2012 M/s. Invensys Development Centre India (P) Ltd., Hyderabad. ordinate 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 l ist of comparables. In this view of the matter, we hold that this company i .e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. 2.3 Ld. AR also relied on the following decisions: 1. 3DPLM Software Solutions Ltd, (TS-359-ITAT-2013(Bang)- TP) AY 2008-09. 2.. Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 - AY 2008-09. 2.4 Ld. DR relied on the orders of revenue authorities. 2.5 In view of the above, in line with the decisions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies. 3. Tata Elxsi Ltd. (Seg.) 3.1 Objecting to the aforesaid company as comparable, the ld. AR relied on the decision of the Tribunal in assessee s own case for AY 2007-08 wherien the Tribunal held as follows: 7.7 From the facts and material on record and submissions made by the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of product developed and services provided by this company are different from assessee as have been narrated in para 6.6 above. Even the segmental detai ls for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from 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 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 17 ITA.No.1692/Hyd/2012 M/s. Invensys Development Centre India (P) Ltd., Hyderabad. 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 inclusion in the set of comparables in the case on hand. It is ordered accordingly. 3.3 Ld. AR also relied on the following decisions: 1. 3DPLM Software Solutions Ltd, (TS-359-ITAT-2013(Bang)- TP) AY 2008-09. 2.. Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 - AY 2008-09. 3.4 Ld. DR relied on the orders of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies P. Ltd., vs. DCIT, Circle 1(1), New Delhi ITA.No.6485/Del/2012 dated 20th September, 2013. ii) 3DPLM Software Solution Ltd., (Successor to Delmia Solutions P. Ltd.,) Bangalore vs. DCIT, Circle 11(1), Bangalore I.T.(T.P.)A.No.1303/ Bang / 2012 dated 28.11.2013. iii) Adaptec (India) P. Ltd., Hyderabad vs. ACIT, Circle 1(1), Hyderabad ITA.No.1758/Hyd/2012 dated 21.03.2014. iv) M/s. Patni Telecom Solutions P. Ltd., Hyderabad vs. ACIT, Circle 16(3), Hyderabad ITA.No.1846/ Hyd/ 2012 dated 25.04.2013. 4.6.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the l ist of comparables. 19 ITA.No.1692/Hyd/2012 M/s. Invensys Development Centre India (P) Ltd., Hyderabad. 4.6.4. We have heard both parties and careful ly perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) Bearing Point Business ITA.No.1124/Bang/2011 g) LG Soft India Pvt. Ltd. ITA.No.1121/Bang/2011 h) Transwitch India P. Ltd. ITA.No.948/Bang/2011 i) Mercedes Benz Research Development ITA.No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon the decision of the ITAT, Hyderabad in assessee s own case for AY 2005-06 wherein the Bench held as follows: 20. The Learned AR submitted that since the aforesaid company fails the RPT filter it cannot be treated as a comparable. The learned DR supported the order of the TPO. 21. We have considered the submissions of the parties and perused the materials on record. The ground on which the learned AR seeks for exclusion of the aforesaid company is, its related party transaction as a percentage to the total revenue is 34.68% which is more than the accept/reject matrix of more than 25% fixed by the TPO. It is to be noted that in final filters adopted by the TPO in para 9.7 of his order he himself has excluded companies having RPT of more than 25%. We, therefore, direct the Assessing Officer/TPO to examine this aspect and exclude it from the list of comparables if the assessee's contention is found to be correct. 6.2 The ld. AR also relied upon the following cases: 1. ITAT Delhi in case of Cash Edge India Pvt. Ltd. in ITA No. 5848/D/2012 for AY 2008-09 6.3 It is to be noted that in the case of 3DPLM Software Solutions Ltd, (TS-359-ITAT-2013(Bang)-TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices performed by this company are similar to the software development services performed by assessee. From the details on record, we find that while assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the cases of Capital I-Q Information Systems (India) (P) Ltd. that KPO services are not comparable to software development services and are therefore not comparable. Further, the decisions of the coordinate bench in the aforesaid cases of (i) Agnity India Technologies P. Ltd., vs. DCIT, Circle 1(1), New Delhi ITA.No.6485/Del/2012 dated 20th September, 2013 and (ii) 3DPLM Software Solution Ltd., (Successor to Delmia Solutions P. Ltd.,) Bangalore vs. DCIT, Circle 11(1), Bangalore I.T.(T.P.)A.No.1303/ Bang / 2012 dated 28.11.2013, we hold that this company, i.e. e-Zest Solutions Ltd. be excluded from the set of comparables. 7.2 The ld. AR also relied on the decision in the case of 3DPLM Software Solutions Ltd, (TS-359-ITAT-2013(Bang)-TP) AY 2008-09. 7.3 Ld. DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer will only take segmental results relating to services only for comparing the companies Ws. Kals Information Systems, Avani Cincon, LGS GLobal Ltd. and Bodhtree Consulting Systems as the consolidated results of these companies cannot be compared with the assessee, as assessee is admittedly into service providing activities. It is further directed that if segmental results of the above companies relating to similar services as being provided by assessee are not available, then these companies will have to be excluded as comparables as held in various judicial pronouncements relied upon by Ld. A.R . 8.2 In view of the above and also ld. AR submitted that the revenue in FY 2007-08 is three times higher than the revenue of FY 2006-07. We direct the AO to apply the turnover filter and exclude the companies whose turnover are more than 200 crores. Since, we do not have segmental report, we direct AO to determine the service and product details from this company and if in case it is found that it is into product, this company will have to be excluded from the list of comparables. 9. Persistent Systems Ltd. 9.1 Objecting to the aforesaid company as comparable, ld. AR sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hecase of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual 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 Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 10.2 Respectfully following the said decision, we direct the AO/TPO to exclude the said company as comparable from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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