TMI Blog2016 (6) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... ot go into the claim of the assessee regarding adoption of correct operating profit of two companies i.e. M/s. Sasken Communication and M/s. Larsen & Toubro Ltd., because the same is of academic interest only. - IT(TP)A Nos. 1008 and 977 (BNG.)/2014 - - - Dated:- 30-6-2016 - A.K. Garodia, and Vijay Pal Rao For the Appellant: P.K. Prasad and Umashankar, C.A. For the Respondents: Shankar Prasad, JCIT ORDER A.K. Garodia, Member (A) 1. These are cross appeals filed by the assessee and the revenue which are directed against the order of the ld. CIT(A)-IV, Bangalore dated 29-05-2014 for the assessment year: 2009-10. 2. The grounds raised by the assessee in its appeal are as under; 1. The grounds mentioned herein taken by the Appellant are without prejudice to one another. 2. That the order passed by the Learned Commissioner of Income Tax (Appeals) - IV, Bangalore ['CIT (A)], to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. Transfer Pricing related 3. That the learned CIT(A) erred both in facts and law in confirming the action of the learned Transfer Pricing Officer's ( TPO )/Learned Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a comparability criterion; b. Accepting certain comparable companies rejected by the Appellant by applying exceptional year(s) of operations as a comparability criterion. 7. That the learned CIT(A) erred in upholding the learned TPO's approach of not applying multiple year/prior year data for comparable companies while determining the arm's length price and in doing so also erred in using the data as at the time of assessment proceedings, instead of that available during IT 2008-09, wherein the Appellant was required to prepare and maintain the TP documentation. 8. That the learned CIT(A) erred in erred in upholding the rejection of 2 comparable companies, Thinksoft Global Services Limited and FCS Software Solutions Limited, by the learned TPO by stating that the working capital adjustment resulted in reduction of profit margins by more than 4%. 9. That the learned CIT(A) erred in upholding the computation of working capital adjustment by considering the incorrect operating costs, receivables and payables amount of certain comparable companies. 10. That the learned CIT(A) erred in upholding the action of the learned AO/learned TPO in limiting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses are to be reduced only from the export turnover. 3. The CIT(A) erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 4. The CIT(A) erred in holding that the TPO shall verify the claim of the assessee that some of the assessee's comparables satisfy the RPT and Export earnings filters but nevertheless were not excluded from the final set of com parables with a further direction to include the com parables satisfying his very own filters without appreciating that the directions of the CIT(A) cannot be given effect to without giving an opportunity to the assessee and without re-examining all the comparables and the directions of the CIT(A) are beyond the powers of the CIT(A) subsequent to the amendment to the provisions of Section 251(1)(a), withdrawing the powers of setting aside. 5. The CIT(A) erred in directing the AO to compute the margin of both the assessee as well as the comparable companies by including the foreign exchange gains or loss without appreciating the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka High Court that the total turnover is sum total of export turnover and domestic turnover and therefore, if any amount is reduced from the export turnover, the total turnover is also to be reduced by the same amount as a consequence thereof. Under these facts, we find no reason to interfere in the order of the ld. CIT(A) on this issue. 6. Ground No. 1 to 3 of the revenue are rejected. 7. Regarding ground No. 4 to 8 of the revenue's appeal, it was submitted by the ld. DR of the revenue that he ld. CIT(A) has no power to restore the matter back to the file of the AO and therefore, the order of the ld. CIT(A) is not sustainable. As against this, it was submitted by the ld. AR of the assessee that if considered proper, these issues may be restored back to the file of the AO by the Tribunal. 8. We have considered the rival submissions. We find force in the submissions of the ld. DR of the revenue that the ld. CIT(A) has no power to restore the matter back to the file of the AO and instead of restoring the matter back to the file of the AO, he should have decided the issue himself after obtaining remand report from the AO if required. But considering this fact that mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, it has to be accepted that there is functional dissimilarity because, the assessee is not engaged in general insurance sector as Kals Information System. In the same chart, the assessee also placed reliance on the Tribunal order rendered in the case of M/s. Cisco Systems (Ind.) Pvt. Ltd ., in IT(TP)A No. 271(Bang/2014. Copy of the order is available on pages 82 to 142 of Case Law Compendium. In particular, our attention was drawn to para-26.3 of the order on pages 101 to 103. In this case, the Tribunal has followed another Tribunal order rendered in the case of M/s. Trilogy e-business Software India Pvt. Ltd ., I ITA No. 1054 (Bang.)/2011. Copy available on pages 20 to 81 of the paper book. 14. The ld. DR of the revenue could not point out any difference in facts in the present case and in these cases of the Tribunal orders and therefore, respectfully following these Tribunal orders, we direct the AO/TPO to exclude these companies from the final list of comparables. 2) M/s. Bodhtree Consulting Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of M/s. Cisco Systems (Ind.) Pvt. Ltd ., (Supra) and in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables. (ii) Flextronics Software Systems Ltd.: The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/s. Tata Elxsi Ltd. should not be regarded as a comparable. 15. Since ld. DR of the revenue could not point out any difference in facts, respectfully following these Tribunal orders, we direct the AO/TPO to exclude this company also from the list of final comparables. 4. Persistent Systems Ltd., For exclusion of this company, reliance has been placed on the Tribunal order rendered in the case of M/s. Unisys India Pvt. Ltd ., in IT(TP)A No. 67(Bang.)/2015, copy available on pages 210 to 246 of case law compendium and in particular, our attention was drawn to para 36 to 37 of the Tribunal order. These paras are reproduced as under:- 36. As far as Persistent Systems Ltd. a comparable by the assessee in his TP study but was objected by the assessee before the TPO as not comparable, this Tribunal in the case of IT(TP)A No. 108(Bang.)/2014 order dated 12-12-2014 in the case of Yodlee Infotech Pvt. Ltd. Vs. ITO held as follows: 5.12. ............... This Tribunal in the case of 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of software and it assumed all risks leading to higher profits, whereas the respondent assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent-assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted . 17. From the above para of the judgment of the Hon'ble Delhi High Court, it is seen that this company is a giant company in the area of software and it assumed all risks leading to higher profits, whereas the assessee company was a captive unit of the parent company and assumed only a limited risk. In the present case also, the assessee company is providing services to the parent company and therefore, assuming only limited risk and hence, respectfully following this judgment of the Hon'ble Delhi High Court, we direct the AO/TPO to exclude this company also from the list of final comparables. As per the TPO's order Annexure-B, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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