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Agilis Information Technologies Interntional Pvt. Ltd. (Now known as Infogix International Pvt. Ltd.) Versus ITO Ward-1 (4) Range-1, New Delhi

2017 (11) TMI 800 - ITAT DELHI

TPA - exclusion and inclusions of the comparables - Selection criteria of comparables - Held that:- Assessee is established in India to undertake software development and installation of computerized systems, conduct feasibility studies, systems analysis and design as well as design of special software and system and application of software. It is also engaged in the business of rendering technical services related to tabulation, coding and software development. It is established to undertake an .....

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ND MS SUCHITRA KAMBLE, JUDICIAL MEMBER For The Appellant : Shri. Neeraj Jain, Adv For The Respondent : Sh. H. K. Choudhary, CIT-DR ORDER PER SUCHITRA KAMBLE, JM This appeal has been filed by the assessee against the Assessment Order dated 27/01/2016 passed by ITO, Ward-1(4), New Delhi u/s 143(3) read with Section 144C of Income Tax Act, 1961 in Assessment Year 2011-12. 2. Agilis Information Technologies International (I) Ltd. is established in India to undertake software development and installa .....

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software, application software, integrated tolls for computer systems and application development, data communication and network. The international transaction was software development and support services for ₹ 14,31,12,709/-. The assessee used TNMM as the method and OP/TC as the PLI. The assessee arrived at a set of 23 companies with an average margin of 7.64%. The assessee has used multiple year data. The assessee s own margin is worked out to be 7.99%. Based on this analysis, the asse .....

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by the TPO. 3. The TPO applied the following quantitative and qualitative filters for the purpose of benchmarking analysis. (i) Use of current year data (ii) Companies having different financial year ending were rejected (iii) Companies having sales less than 5 crores were rejected (iv) Companies undertaking significantly different functions compared to applicant (v) Income from export sales at least 75% of the total sales from Software Development services income (vi) Companies having service .....

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on cost ratio of 28.52%. S. No. Company Name OP/OC% 1 Persistent Systems and Solutions Ltd. 22.12 2 Larsen & Turbo Infotech Ltd. 18.40 3 Persistent Systems Ltd. 23.08 4 asken Communication Technologies Ltd. 24.36 5 Zylog Systems Ltd. 28.74 6 Wipro Technologies Ltd. (Wipro Technologies Services Ltd.) 54.42 Average Margin 28.52 The TPO made an adjustment of ₹ 2,72,60,794/- on account of the difference in the arm s length price of the international transaction of provision of software dev .....

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ems and Solutions Ltd. (4) Sasken Communication Technologies Ltd. (5) Larsen & Turbo Infotech Ltd. (6) Persistent Systems Ltd. 4.1 Wipro Technologies Limited (Wipro Technologies Services Ltd.) The Ld. AR submitted that this comparable is not functionally identical with the assessee company. Company is engaged in providing program management, third party data security, quality assurance and business process management services. The company is a software product company. Company in year 2012 h .....

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ology Infrastructure Services and application development and maintenance services for the period of six years, which also includes the year under consideration. This shows that income from software development support and maintenance services was earned by Wipro Technology Services Ltd., from Citi Group Inc., by means of master service agreement entered into between Wipro Ltd., its parent company and Citi Group Inc., a third person. The Ld. AR relied on the decision of Hon ble Delhi Bench of th .....

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er of related party transactions as proposed by the learned TPO cannot be applied. It was further contended that as per the information available on public domain, the company is engaged in providing program management, third party data security, quality assurance and business process management services. It was submitted that substantial business of the company is concentrated in financial and banking sector, also being formerly known as CITI Technologies Services Ltd. It was contended further .....

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ftware products and thus is not comparable for the purpose of benchmarking companies engaged in software development services. Respectfully following the decision of Co-ordinate Benches of the ITAT, we hold that WIPRO Technology Services Ltd. has been wrongly included by the Assessing Officer in the case of the present assesse as comparables for the purpose of benchmarking the international transaction. 4.2. The Ld. DR submitted that the company is functionally comparable as set out in the order .....

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duct in the name of FLoW for the retail sector users. But the assessee company is not a software product company, it is undertaking software development and installation of computerized systems, conduct studies, systems analysis and design as well as design of special software and system and application of software. The assessee is also engaged in rendering technical services related to tabulation, coding and software development as well as export of software and other computer related activitie .....

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than a complete product. Therefore, WIPRO Technologies Ltd. is functionally different from the assessee company and should have been excluded by the TPO. We therefore, direct TPO to exclude this comparable. 4.4 Zylog Systems Ltd. The Ld. AR submitted that extra-Ordinary event occurred during the year as the company has acquired M/s. Brainhunter Inc, Canada. The Ld. AR relied on the following decisions, wherein the various benches of Tribunal have consistently taken a view to exclude companies h .....

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s. ACIT (ITA No.1196/Hyd/2010) • M/s NTT Data India Enterprise vs. ACIT (ITA No. 1612/Hyd/2010) • Calibrated Healthcare Systems India Pvt. Ltd. vs. ACIT • Toluna India Pvt. Ltd. vs. ACIT (ITA No.5645/Del/2011) • Lear Automotive India P. Ltd. Vs. ACIT (ITA No. 5612/Del/2011) and • Global Logic India Pvt. Ltd. vs. ACIT (ITA No. 5809/Del/2011) The Ld. AR further submitted that the segmental data was not available for the assessment year under question. The company is earnin .....

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bmitted that the company is functionally comparable as set out in the order of the TPO. The Ld. DR submitted that the upper limit turnover filter is not applicable in the case of the assessee. This company is involved in Software Development activities and passes all the filters also. 4.6. We have heard both the parties and perused the records. The segmental data was not available for the assessment year under question of this company. The company is earning revenue from two business segments, n .....

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cluded. Therefore, we direct TPO to exclude this company from comparables. 4.7 Persistent Systems & Solutions Ltd. The Ld. AR submitted that the company is "functionally not comparable because of the incomparable financial results arising out of the exceptional circumstances in the financial year ending on 31st March, 2011. The Ld. AR submitted that the company is earning abnormal profits during the Financial Year 2010-11 on the basis of below facts: Year 2009 2010 2011 Net Profit 83,58 .....

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directed to exclude a company on account of abnormal year of operation: 12. We have perused all the records and taken into consideration the contentions of the parties as relates to Revenue s appeal the same is only on the issue that exclusion of Mold-Tek Technologies Ltd as comparable by the CIT(A) is not just and proper but when we take into account, the special Bench Judgment in case of Mold-Tek Global Centre India Pvt. Ltd it can clearly be taken into account that the company grew with a co .....

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(A) was correct in excluding Mold-Tek Technologies Ltd. as comparable and hence the Revenue is not proper in harping that Mold-Tek has to be taken into account as a comparable in TP study. As regards to the Cross-objection of the assessee is concerned the Ld. A.R during the course of hearing stated that the same may be treated as not pressed if the appeal of the Department is dismissed. Since in the former part of the order, we have dismissed the appeal of the Departmetn, the Cross Objection of .....

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no 418/Bang/2008) • Adobe Software India Pvt Ltd vs Addl. CIT (ITA No 4061/Del/2010) • Quark System Vs. DCIT - ITA No.100/CHD/2009 • Frost and Sullivan India Pvt. Ltd. - ITA No.2073/Mum/2010 • Mentor Graphics (Noida) Pvt Ltd vs DCIT (ITA no 1969/D/2006) • Sapient Corporation Pvt Ltd vs DCIT (ITA No 5263/Del/2010) • ACIT vs. NIT Limited (ITA No. 1844/Del/2009 • Symantec Software Solutions Pvt. Ltd vs. ACIT 4.8. The Ld. DR relied upon the order of the TPO and the .....

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is not comparable with the assessee company. Thus, we direct TPO to exclude this company as comparable. 4.10 Sasken Communication Technologies Ltd. The Ld. AR submitted that as regards this company there is non-availability of data wise information of segments with respect to software development services in the annual report. The Ld. AR relied upon the case of Saxo India Pvt. Ltd Vs. ACIT (ITA No. 6148/del/2015) whereby Tribunal directed to exclude the aforesaid company on account of unavailabi .....

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poses of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee s contention is accepted on this issue. The Ld. AR also relied upon the decision of Delhi Bench of the Tribunal in the case of Motorola Solutions India Private Limited Vs. ACIT (ITA 5637/Del/2011), wherein, the company was rejected on account of .....

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s company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra), we direct the Id. TPO to exclude this comparable from the list of comparables. 4.11. The Ld. DR relied upon the order of the TPO and the DRP. 4.12. We have heard both the parties and pe .....

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s, we direct the TPO to exclude this comparable. 4.13 Larsesn & Turbo Infotech Ltd. The Ld. AR submitted that this company is engaged in two business segments, namely, software development services and software products. However, segmental data with respect to business segment is not available in the annual report of the company. From the audited financial statement and website, it is evident that the company is earning revenue from two business segments, viz., software development and softw .....

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ort of this company, which is available in the third paper book that its Profit and loss account shows Revenue - Revenue software development services and products . Profit and loss account of this company having a list of software development expenses contains an item 'Cost of bought-out items for re-sale with a value of ₹ 25.55 crore. Apart from that, the balance-sheet of this company shows certain 'Software in its Schedule of fixed assets under the head 'Intangible assets . .....

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and software products. However, segmental data with respect to business segment is not available in the annual report of the company. From the audited financial statement and website, it is evident that the company is earning revenue from two business segments, viz., software development and software product. Therefore, this company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable. 4.16. Persistent Systems Ltd. The Ld. AR submitted that the company is e .....

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e relevant material on record, we find from Profit & Loss Account of this company, a copy of which is placed at page 1534 of the paper book, that its income from Sale of software services and Products is amounting to ₹ 6101.27 millions. The TPO has himself observed that this company does have some products, but, product revenue is only 7.2% and, hence, this company is predominantly a software service provider. This discussion is contained in para 21.67 of the TPO s order. Even Schedule .....

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e company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, we, therefore, order for the exclusion of this company from the list of comparables. 4.17. The Ld. DR relied upon the order of the TPO and DRP 4.18. We have heard both the parties and perused the material available on record. Persistent Systems Limited is engaged in product development, product design and analysis service is functionally different from a pu .....

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sessee company. After undertaking the aforesaid analysis, the average operating profit to cost ratio of the remaining companies works out to 2.25%, as under:- S. NO. Company Name OP/OC (%) 1 Cat Technologies Ltd. 1.90% 2 CG-VAK Software & Exports Ltd. -2.28% 3 Chakkilam Infotech Ltd. 7.13% Average 2.25% Since, the operating profit margin of the assessee company at 7.99% is higher than the average operating profit margin of the final comparable companies at 2.25%, therefore, the international .....

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cted this comparable as the functional profile of the company is different from that of the assessee company. 5.3 We have heard both the parties and perused the records. From the Annual Report of this company it is clearly offering technology products and services which is set out in outlook of the company. The records do not give the segmental breakups of the software service and software products. Therefore, this company is not fulfilling the criteria of the comparable for Arms Length Price. T .....

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ere is decline in the profitability of the company. The company is not showing employee cost as separate head of expenses and is included in cost of services. 5.6. We have heard both the parties and perused the records. The Annual Report of the company clearly sets that this company is dealing with software Development, Product & Services and there is no segmental data available for software development, product and services. Thus, the company is not only functionally different but also segm .....

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ed this as comparable because there is non-availability of the data. 5.9 We have heard both the parties and perused the records. The Annual Report of the company clearly sets that this company is dealing with software testing, software Development services and Healthcare services and there is no separate segmental data available for software development services. Thus, the company is not only functionally different but also segmental data is not available. Therefore, this company is not fulfilli .....

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