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Agilis Information Technologies India Pvt. Ltd. (Now known as Infogix International Pvt. Ltd.) Versus ACIT Cirlc-12 (1) , New Delhi

2017 (11) TMI 908 - ITAT DELHI

TPA - selection of comparable - Held that:- Assessee is engaged in rendering of services i.e. “Software Development Services”. It is also engaged in the business of rendering technical services related to tabulation, coding and software development. It is established to undertake and engaged in export of software, computer skilled manpower and other computer related activities to carry out development in the area of information technology, computer systems, software, application software, integr .....

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by the assessee against the Assessment Order dated 29.12.2016 passed by ACIT, Circle-12(1), New Delhi u/s 143(3) read with Section 144C of Income Tax Act, 1961 in Assessment Year 2012-13. 2. Agilis Information Technologies International (I) Ltd. 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 .....

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tered into international transaction of ₹ 20,61,19,812 regarding rendering of services i.e. Software Development Services . The assessee used TNMM as the method and OP/TC as the PLI. The assessee arrived at a set of 9 companies with an average margin of 7.64%. The assessee used multiple year data. The assessee s own margin worked out to be 13.48%. Based on this analysis, the assessee concluded that its international transactions are at arm s length. A show cause notice dated 07.12.2015 was .....

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ng analysis. (i) Use of current year data (ii) Companies having different financial year ending were rejected (iii) Companies having sales less than 1 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 income at-least 75% to total operating income (vii) Companies having employee cost to operating cost ratio more .....

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. (seg) 65.92 2 Akshay Software Technologies Ltd. 7.77 3 Celstream Technologies Pvt. Ltd. 11.34 4 Cigniti Technologies Ltd. 8.28 5 Infosys Ltd. 42.15 6 Sasken Communication Technologies Ltd. 14.58 7 Lucid Software Ltd. 11.10 8 Larsen & Toubro Infotech Ltd. (Industrial Cluster) 27.16 9 Persistent Systems Ltd. 26.92 10 R S Software (India) Ltd. 15.43 11 Sankhya Infotech Ltd. 5.68 12 Mindtree Ltd. (IT Service Segment) 19.19 13 Spry Resources Pvt. Ltd. 33.59 14 Tata Elxsi Ltd. 14.32 15 Thirdware .....

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1 was passed by the then Assessing Officer on 15.03.2013 while making adjustment of ₹ 2,61,32,755/- on account of TP adjustment. The assessee company filed objection before the Dispute Resolution Panel (DRP) and DRP issued certain directions to the TPO vide order dated 18.11.2016. The TPO followed the DRP directions as follows: S. No. Name of the Company OP/OC (%) DRP directed to consider forex as operating OP/OC (%) 1 Acropetal Technologies Ltd. (seg) 65.92 65.92 2 Akshay Software Technol .....

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Elxsi Ltd. 14.32 15.17 15 Thirdware Solutions Ltd. (Overseas segment) 11.10 11.10 16 Zylog Systems 32.01 28.38 Average 21.65 20.48 Thus, the Assessing Officer vide order dated 29.12.2016 assessed total income at ₹ 3,55,88,710/-. The computation of income as per Assessing Officer is as follows: Total income as per Return of Income Rs.1,16,94,390 Add Addition on account of ALP Rs.2,38,94,318 Total Assessed income Rs.3,55,88,708 4. The Ld. AR submits that the assessee is praying for exclusion .....

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Technologies Ltd. The Ld. AR submitted that this company is functionally different from the assessee company. This company is engaged in provision of high end healthcare services and develops & owns related intellectual property providing a substantial competitive advantage to this company, leading to higher profitability. As per the annual report, the company is engaged in the sale of software products. The Ld. AR submitted that from page 6 of the annual report it is evident that within the .....

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mitted that from the profit and loss account, it is evident that the company is earning revenue from sale of products, namely, product hardware and product software. As on 31st March 2012, the company held inventories amounting to ₹ 21,01,502, which clearly establishes the fact that the company is engaged in the business of sale of software product. Thus, the company is engaged in two business segments, i.e., sale of products and sale of services but segmental profitability is not availabl .....

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company acquired two US based companies, namely, Line Beyond Inc, and Optech Consulting Inc. The company acquired 100% stake in Line Beyond Inc. and 70% stake in Optech Consulting Inc. Further, the company also acquired two domestic companies, viz., Mind River Information Technologies Ltd. and Kinfotech Pvt. Ltd. Thus, the Ld. AR submits that it is an extra-ordinary event which the TPO has overlooked while selecting this as comparable. 4.2 The Ld. AR relied upon the decision of Hon ble Delhi Hi .....

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in the Tribunal directed to exclude Acropetal Technologies Ltd. holding that the services provided by the company are in the nature of high end services coming within the category of knowledge process outsourcing (KPO) and the company cannot be compared with a low end service provider. The Ld. AR relied upon the following decisions, wherein, Acropetal Technologies Ltd. has been excluded on account of functional dissimilarity: • Symphony Marketing Solutions India Private limited vs. ITO (ITA .....

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) • Siemens Technology & Services Pvt. Ltd. vs. ACIT (ITA No. 1601/Bang/2012 • ADP Pvt. Ltd. vs. DCIT (ITA No. 191/Hyd/2014) • S&P Capital IQ (India) Private Limited vs. DCIT (ITA No. 22/Hyd/2016. • Excellence Data Research P. Ltd. Vs ITO (ITA No. 159/Hyd/2014) • Swiss Re Shared Services (India ) P. Ltd. Vs. ACIT (ITA No. 380/Bang/2016) The Ld. AR also relied upon the following decisions wherein, a company is directed to be excluded on account of non-availability .....

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, 5612/Del/2011) and • Global Logic India Pvt. Ltd. vs ACIT (ITA No. 5809/Del/2011) • Bechtel India Pvt. Ltd. vs. DCIT (ITA No. 1478/Del/2015) • Equant Solutions India (P.) Ltd, vs. DCIT (ITA No. 1202/Del/2015) 4.3 The Ld. DR submits that the segment is of IT service only and there is no product included in the same. The Ld. DR further submits that % is very less so hardly it will make any difference. The Ld. DR relied upon the orders of the TPO and the DRP. 4.4 We have heard both .....

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on, than a complete product. Therefore, Acropetal Technologies Limited is functionally different from the assessee company and should have been excluded by the TPO. Further, the segmental data was not available for the assessment year under question of this company. The company is engaged in two business segments, i.e., sale of products and sale of services but segmental profitability is not available in the audited financial statements. The assessee company cannot be compared with this company .....

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O to exclude this company from comparables. 4.5. Infosys Ltd. The Ld. AR submitted that as per page 9 of the annual report, the company has set up a network of research labs and during the relevant previous year 143 unique patent applications were filed by the company. The Ld. AR further submitted that the company has been granted 47 patents out of which 46 are in USA and one in Luxemburg. At page 26 of the annual report it is also stated that the company recognizes it s strong brand as one of i .....

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n the field of software product, also owns various unique intangibles in the form of proprietary products, patents, brands etc which leads to creation of significant competitive advantage resulting high operating margins which are valuable intangibles due to which it is earning exceptionally high operating margins. The Ld. AR submitted that since Infosys Ltd is engaged in development and sale of software products. The software products developed by the company includes Finacle TM, Finacle core b .....

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nal in the case of Ut Starcom Inc. (India Branch) vs. DDIT (ITA No. 5848/Del/2011), also directed to exclude Infosys holding that the company is a giant risk taking company and cannot be compared with a captive service provider. Delhi Bench of the Tribunal in the case of Avaya India Pvt. Ltd. vs. DCIT (ITA No. 146/Del/2013) directed to exclude Infosys on account of being a giant company. Delhi Bench of the Tribunal in the case of AVL India Software Pvt. Ltd. vs. DCIT (ITA No, 6454/Del/2012) dire .....

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(ITA No. 6867/Del/2014) iii. Sony Mobile Communications International AB (India Branch Office) vs. DDIT (ITA No. 769/Del/2014) iv. Headstrong Services (India) Pvt. Ltd vs. DCIT (ITA No. 714/Del/2015) v. Bentley Systems India Pvt. Ltd. vs, ACIT (ITA No. 6161/Del/2013) vi. Sun Life India Service Centre Pvt. Ltd. vs. DCIT (ITA No. 1489/Del/2014) vii. Avaya India (P) Ltd. vs. ACIT (ITA No. 5528/Del/2011) viii. Alcatel-Lucent Technologies vs. DCIT (ITA No, 2298/Del/2008) ix. DCIT vs. Mentor Graphics .....

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ors India Pvt. Ltd. vs. ACIT (ITA No. 1174/Bang/2011) (iv) (Sapient Corporation Pvt. Ltd vs. DCIT (ITA No 5263/Del/2010) (v) Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/10 (vi) Trilogy E-Business Software vs. DCIT : 47 SOT 45(URO) (vii) Nethawk Networks India Pvt. Limited. Vs. ITO (ITA 7633/Mum/2012) (viii) Toluna India Pvt. Ltd. vs. ACIT (ITA No.5645/Del/2011) (ix) Lear Automotive India P. Ltd. Vs. ACIT (ITA No. 5612/Del/2011) (x) Global Logic India Pvt. Ltd. vs. ACIT (ITA No .....

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herefore, direct TPO to exclude this company from comparable. 4.8. Larsen & Turbo Infotech Ltd. The Ld. AR submitted that segmental data is not available. As per the annual report, the company is IT BPO service provider. The Ld. AR relied upon the order decision of Delhi Bench of the Tribunal in case of Saxo India Pvt. Ltd. vs. ACIT (ITA No. 6148/Del/2015), wherein, L&T Infotech Ltd. was directed to be excluded holding that the company is also engaged in business of software product and .....

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n account of unavailability of segmental data: • Pegasystems Worldwide India Pvt. Ltd vs. ACIT (ITA No. 1758/Hyd/2014) Cerner Healthcare Solutions P Ltd vs ITO (ITA No, 44/Bang/2015) • Invensys Dvelopment Centre India Pvt, Ltd. vs DCIT (ITA No 383/Hyd/2014) • M/s Broadcom India Research Pvt Ltd. vs, DCIT (ITA No, 62/Bang/2014) 4.9 The Ld. DR relied upon the orders of the TPO and DRP 4.10 We have heard both the parties and perused the material available on record. This company is e .....

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arable. 4.11. Mindtree Limited: The Ld. AR submitted that this company is functionally different and engaged in development and sale of Software Products. At page 22 of the annual report, it is stated that the company has developed series of products and technologies such as Enterprise Collaboration Platform", CPG- Retail Collaboration Platform , stock management framework, AppFactory etc. The Ld. AR further submits that Mindtree Ltd undertakes significant research activities leading to cre .....

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ase of Global Logic India Pvt. Ltd. vs. DCIT (ITA No 122/De!/2013) wherein the Tribunal held that companies undertaking R&D activity and owning IPRs cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transactions undertaken by a captive software service provider. 4.12 The Ld. DR relied upon the orders of the TPO and the DRP. 4.13 We have heard both the parties and perused the records available before us. This company is engaged in development &a .....

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be excluded. Therefore, we direct TPO to exclude this company from comparables. 4.14. Persistent Systems Ltd. The Ld. AR submitted that Persistent Systems Ltd. is engaged in the business of development and sale of software products and therefore, cannot be regarded as comparable to the applicant, a routine software service provider From the annual report of the company, it would be appreciated that during the relevant previous year, the company launched a new product, namely, eMee, an employee e .....

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Hon ble Delhi High Court vide order dated 04.05.2016 (ITA No, 279/2016). Delhi Bench of the Tribunal in the case of Equant Solutions India Pvt, Ltd. vs. DCIT (ITA No. 1202/Del/2015), directed to exclude Persistent Systems Ltd holding that it is engaged in software product and segmental data is not available. The Ld. AR relied upon the following decisions, wherein, the Benches have specifically held that Persistent Systems Limited is engaged in product development and product design and analysis .....

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AT & T Global Business Services India (P.) Ltd ITA 1604/Bang/2012 NXP Semi Conductors India Pvt. Ltd I T. (T.P.)A. No.1634/Bang/2014 • Hewlett- Packard (India) Globalsoft P Ltd I.T(TP).A No.1031/Bang/2011 Pyramid IT Consulting Private vs. ITO (ITA No. 5401/Del/2012) • Global Logic India Pvt. Ltd. vs. ACIT (ITA No. 122/Del/2013) Lear Automotive India P. Ltd. Vs. ACIT (ITA No. 5612/Del/2011) • M/s ION Trading India Pvt. Ltd. vs. ITO (ITA No. 1035/Del/2015) 4.15. The Ld. DR reli .....

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t has to be excluded. Therefore, this company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable. 4.17. Spry Resources Pvt. Ltd. The Ld. AR submitted that the audited financial statement for the Financial Year 2011-12 is not available. 4.18 The Ld. DR relied upon the order of the TPO and the DRP. 4.19. We have heard both the parties and perused the records. Since the audited financial statement for the Financial Year 2011-2 was not available to the assess .....

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any is engaged in the business of development and sale of software products. At page 21 of the annual report, it is stated that products and solutions offered by the company are it s main differentiators vis-a- vis the competitors. The company invests heavily in development of new products and also owns IP rights with respect to various software products such as Field Power, Smart Migrator and Bank. Companion. Further, at page 26 & 37 of the annual report, it is stated that the company spend .....

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ons (P) Ltd.), directed to exclude Zylog Systems Ltd. holding that the company holds intangibles, segmental data is not available and there was a merger during the year. Following the decision for assessment year 2010-11, Delhi Bench of the Tribunal in the case of Orange Business Services India Solutions Pvt Ltd. vs. DCIT (ITA No. 869/Del/2016), directed to exclude Zylog Systems Ltd. on account of unavailability of segmental data and mergers and acquisitions undertaken in the preceding year. The .....

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and software products. However, separate segmental data with respect to the aforesaid two segments is not available in the financial statement. The assessee company cannot be compare with this company as the functions are different and there is no segmental data available. The company invests heavily in development of new products and also owns IP rights with respect to various software products such as Field Power, Smart Migrator and Bank. Companion. As held by the Hon ble Delhi High Court & .....

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hat vide show cause notice dated 07.12.2015, TPO rejected Thinksoft Global Services Ltd. holding that the company is functionally not comparable to the assessee without pointing out any specific functional dissimilarity. In response, the assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. However, the TPO failed to adjudicate the aforesaid objection in the Transfer Pricing order. The Ld. .....

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vices. The Ld. AR relied upon the decision of Pune Bench of the Tribunal in the case of TIBCO Software India Pvt. Ltd. vs. DCIT (ITA No. 2536/PN/2012), wherein, the Tribunal directed TPO to include Thinksoft Global Services Ltd holding that verification and validation services provided by the company is similar to software development services. 5.2 The Ld. DR relied upon the orders of the TPO and DRP. 5.3 We have heard both the parties and perused the records. The assessee company vide reply dat .....

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cted Sonata Software Ltd. whereby holding that the company is functionally not comparable to the assessee company. In response, the assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. The Ld. AR submitted that during the year, the company earned 100% of its revenue from export of software development and related services. From revenue recognition policy reported in notes to accounts, it i .....

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n response, the assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. However, the TPO failed to adjudicate the aforesaid objection in the Transfer Pricing order. Therefore, we direct the TPO to adjudicate the objection of the assessee. The TPO, thereafter, should consider whether this comparable is proper or not in assessee s case. 6. The Ld. AR submitted the final set of comparable compan .....

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