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United Online Software Development (India) Pvt. Ltd., Hyderabad. Versus ITO, Ward 3 (2) , Hyderabad

2014 (6) TMI 997 - ITAT HYDERABAD

TPA - selection of comparable - Held that:- The assessee is engaged in providing software development services only to its AE in USA on cost plus basis. Assessee is registered under the Software Technology Parks of India’s Scheme of Government of India as 100% export oriented unit, thus companies functionally dissimilar with that of assessee or any extraordinary event undertaken need to be deselected from final list of comparable. - Allowance of risk adjustment - Held that:- It is a fact th .....

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es as per our directions, hereinabove, the assessee’s margin is found to be within Arm’s length, then, issue of risk adjustment may not arise. This ground of the assessee is considered to be allowed for statistical purposes. - Excluding communication expenses from the export turnover while computing deduction u/s 10A - Held that:- This issue is squarely covered by the decision of the Hon’ble Bombay High Court in case of CIT Vs. Gemplus Jewellery [2010 (6) TMI 65 - BOMBAY HIGH COURT] and ITO .....

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3) of the Act in pursuance of the directions issued by the Dispute Resolution Panel (DRP). The appeal pertains to the assessment year 2006-07. 2. Briefly the facts are, the assessee an Indian Company is wholly owned subsidiary of Juno Online Services Inc. (herein after referred to as Associated Enterprise in short AE ). The assessee is engaged in providing software development services only to its AE in USA on cost plus basis. Assessee is registered under the Software Technology Parks of India s .....

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e proceeding before him, the TPO on examining the TP study undertaken by the assessee through an external consultant as well as other documents submitted in course of proceeding noted that the assessee had received an amount of ₹ 18,25,29,242/- from provision of software development services to its AE. Assessee has adopted transaction net margin method (TNMM) as the most appropriate method and has selected 36 companies as comparables for bench marking its price charged for the internationa .....

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in case of 27 companies and in respect of the rest 9 companies, assessee has considered current year data along with data relating to the preceding two years. After rejecting TP document furnished by the assessee, the TPO undertook a search in the data bases by adopting some of the filters applied by the assessee along with some other additional filters which yielded 20 comparables with average margin of 20.68%. After allowing working capital adjustment of 1.48%, TPO worked out ALP margin at 19. .....

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f the Act by reducing communication charges of ₹ 8,00,1,768/- from the export turnover. Being aggrieved of the draft assessment order, the assessee raised objections before the DRP. 3. The DRP having rejected all objections raised before it, the AO passed final assessment order, which is under challenge in the present appeal. 4. Ground Nos. 1 to 12 are on transfer pricing issues. At the outset, the learned AR expressed his intention not to press Ground Nos. 1,2,3,4,5,6, 10 & 12. In res .....

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itted that this company is functionally different. It was submitted that during the year the company had sold IP rights in the software developed by it, which has impacted its profitability of the year. Hence, the company not only does not satisfy the 75% service revenue filter applied by the TPO, but, has an exceptional year of operations. It was submitted that the performance of the software segments clearly indicate that the company has income from sale of products. The learned AR further sub .....

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PT/Sales 60.60% ii. It was therefore submitted that this company under no circumstances can be considered as a comparable to the assessee, which is a purely software development service provider. The learned AR submitted that ITAT, Bangalore Bench in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010 dated 30/04/2013 has held the aforesaid company not to be a comparable in respect of a purely software development service provider. For the same reason Ld. AR sought exclus .....

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ed the submissions of the parties and perused the materials on record. As can be seen, the TPO at page 53 of his order has categorized the assessee as a pure software development service provider. The comments of the TPO in this regard are extracted hereunder for the sake of convenience: Software Product Company A company who develops a software product by following all the steps involved in creating software as explained above from Domain Analysis to Testing. In this case, intellectual property .....

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longs to the customer and not to the service provider. The taxpayer falls in this category. Thus comparables are also to be chosen from companies whose significant activities (> 75% of the operating revenues) are in the nature of or relate to software development services. As can be seen from the above extracted portion, the TPO has himself mentioned that a pure software development service provider does not generate any intellectual property for its own. He has further stated that, the compa .....

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i Technologies India Pvt. Ltd. Vs. ITO (supra), the ITAT Bangalore Bench while examining the issue of comparability of the aforesaid company to a purely software development service provider has held as under: In so far Kals Info Systems Ltd., and Accel Transmatics Ltd., chosen by the TPO as comparables, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are f .....

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3,351. 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 ITA T in the case of Bind view India Private Limited Vs. DC/, ITA No. ITA No 1386/PN/10 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 co .....

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e 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 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 the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. .....

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d counsel for the Assessee, the Mumbai Bench of ITA T has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India .....

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ture of multifunction kiosks Queue management system, ticket vending system. (ii) Ushus Technologies - offshore development centre for embedded software, network system, imaging technologies, outsourced product development. (iii) Accel lT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/8PO. (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asse .....

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bles for the purpose of determining TNMM margin. " 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken tor comparability purposes. The submission of the Id. counsel for the assessee was that If the above company should not be considered as comparable. The Id. DR, on the other hand relied on the order of the TPO. 50. We have considered the submissions and are of the view that the p .....

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ould be excluded as comparables. " 13. In view of the aforesaid decision of the Tribunal, Kals Info Systems Ltd., and Accel Transmatics Ltd. are to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal. It is ordered accordingly. Facts being materially same and since it pertains to the same assessment year, following the view adopted by the ITAT, Bangalore Bench in the aforesaid case, we are also of the view that this company cannot b .....

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ngaged in selling of products, namely, XIUS suit of packaged products. It was submitted that since segmental financial results in respect of product and services are available in respect of this company, if at all this company is to be treated as comparable, the TPO may be directed to consider the profit margin of software development services segment alone which is 16.97%, In respect of such contention, the learned AR relied upon the following decisions: 1. Trilogy E Business Software India Pvt .....

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aving correctly considered the profit margin of the company by examining the annual report there is no need to modify the order of the TPO in this regard. iii. We have heard the parties and perused the materials on record. On a consideration of the contentions raised by the assessee vis-àvis materials on record as well as decisions of different benches of the Tribunal placed before us, it is quite evident that this company has two separate segments i.e. product and services. Therefore, if .....

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ns. It commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further, due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. Finally, the learned AR submitted that the issue of comparability of Infosys to a captive service provider is no longer RES INTEGRA, due to following decisions of the different benches of the Tribunal: 1. Telcordia Technologies India P. .....

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. Cincom Systems India P. Ltd., Vs. ACIT (ITA No. 761/Del/2012 (AY 2006-07) 9. Adobe Systems India Pvt. Ltd. (TS-320-ITAT-2011 (Del.). 10. Virtusa India Pvt. Ltd., Vs. DCIT (ITA No. 1962/H/2011). 11. Intoto Software India Pvt. Ltd. (ITA No. 1196/H/2010). ii. The learned DR, on the other hand, supported the orders of the DRP & TPO. iii. We have heard the parties and perused the materials on record as well as decisions relied upon by the learned AR. Undisputedly, the TPO has accepted the fact .....

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this company from the list of comparables. IV. Tata Elxsi Ltd. (Seg.) i. Objecting to the aforesaid company being treated as comparable, the learned AR submitted that the said company shall be rejected as comparable since it is a specialized embedded software development company. Further, he submitted that as per the information obtained from the said company u/s 133(6) of the Act, it was stated that due to the complex segments in which they are operating, it is not comparable to any other softw .....

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terials on record as well as decisions relied upon by the learned AR. We find that in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), ITAT Bangalore Bench excluded this company relying upon the decision of ITAT, Mumbai Bench in case of Telcordia Technologies India Pvt. Ltd. (supra) pertaining to the same assessment year i.e. 2006-07. iv. Following the view expressed by Bangalore and Mumbai Benches, of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Tata E .....

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d this company by applying the employee cost filter. However, it was submitted that the employee cost of the company is approximately 62% of the sales. In this connection, the learned AR referred to Schedule 12 & 13 from the annual report of the company. It was further submitted that as per the information provided u/s 133(6) of the Act, the company has clarified that the major portion of the company s activities is outsourcing receipts from clients and no work has been outsourced by the com .....

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the ground that software services include sale of products developed on its own and also, the company is under loss over the year. Further, as the company did not respond to notice u/s 133(6), it was rejected. In this context, the learned AR submitted that the company s software services segment has turnover of ₹ 53 crores whereas the TPO has not brought any evidence to prove that this company has its own product. The fact that the company has no R&D expenditure, as can be seen from th .....

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s the contention of the learned AR that TPO has wrongly rejected by this company applying RPT filter, It is submitted that the RPT of this company is only 3.07% of the total revenue. It is submitted that TPO by including reimbursement transactions has calculated RPT. 6.5 In respect of Golden Stock Technology Ltd., it is submitted that TPO has rejected this company as BPO service provider. The learned AR submitted that the statement relied upon by the TPO in response to the notice issued u/s 133( .....

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ncurred is only 4.25% of the export turnover. Hence, there is no defect in selecting the aforesaid company as comparable. 7. The learned DR, on the other hand, submitted that the TPO having rejected the aforesaid companies after undertaking objective analysis, the assessee s contentions should not be entertained. 8. We have considered submissions of the parties in respect of the aforesaid companies. As can be seen, before the DRP though the assessee has advanced detailed submissions for inclusio .....

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ated as comparable to the assessee also equally applies to this company. In the aforesaid circumstances, except L&T Infotech Ltd., the comparability of the other companies selected by the assessee, but, rejected by the TPO is restored back to the file of the AO/TPO for considering afresh after affording due opportunity of being heard to the assessee. 9. Ground No. 11 is in respect of allowance of risk adjustment. It is a fact that the assessee has raised the issue of risk adjustment before t .....

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