TMI Blog2015 (9) TMI 1612X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions of the assessee for the impugned assessment year, provided other conditions for comparability are satisfied. Ordered accordingly. Ground 3 of the Revenue is treated as allowed for statistical purpose. Remit this issue of comparability of Akshay Software Technologies back to the file of the AO/TPO for fresh consideration in accordance with law, after considering the correct RPT of the said company. Kals Information Systems was not a proper comparable to a software development services company. Web site services is generally considered as falling within ITES segment. That ICRA Techno Analytics was also involved in web-development and hosting is clear from the background information mentioned in its significant accounting policies reproduced supra. Hence, in our opinion before considering ICRA Techno analytics as a proper comparable, it is necessary for a segmental analysis of its results. This issue, in our opinion, requires a fresh look by the AO/TPO so that necessary inputs are taken from the said company for proper analysis of its segmental results and deciding the comparability with that of the assessee. AO/TPO is directed to consider both K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ze is an important facet of an enterprise level difference. He Submitted that comparables should have something similar or equivalent and should possess same or almost the same or almost the same characteristics. To use a simile, he submitted that a Maruti 800 car cannot be compared to Benz car, even though both are cars only. He submitted that unusual pattern, stray cases, wide disparities have to be eliminated as they do not satisfy the test of comparability. Companies operating on large scale benefit from economies of scale, higher risk taking capabilities, robust delivery and business models as opposed to the smaller or medium sized companies and therefore, size matters. Two companies of dissimilar size therefore, cannot be assumed to earn comparable margins and this impact of difference in size could be removed by a quantitative adjustment to the margins or price being compared if it is possible to do so reasonably accurately. He submitted that size as one of the selection criteria has also been approved by various Benches of the Tribunal, in the following cases: 1. Dy. CIT v. Quark Systems (P.) Ltd. (2010) 132 TTJ (Chd)(SB) 1 : (2010) 42 DTR (Chd)(SB)(Trib) 414 : (2010) 38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as accordingly, applied the turnover range of ₹ 1 crore to ₹ 200 crores based on Dun and Bradstreet's analysis. He submitted that in the alternative, the categories recognized by NASSCOM may also be applied in selecting comparables. 8.3 The learned Departmental Representative rebutted this argument and submitted that the Act or Rules does not provide for the turnover filter. He submitted that as rightly pointed out by the TPO in the case of service sector, the size of the company does not matter because, the infrastructure layout is very less and it will not affect the profit ratio in any way. He drew our attention to the particular portion of TPO's order wherein the TPO has the reasoning given for rejecting the turnover filter. 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d raised at S.No. l regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO's setting a limit of 25 percent on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15 percent of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - .. We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15 percent of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d brought this to the notice of the DRP the DRP also was of the opinion that RPT details being not available, Akshay Software Technologies Ltd. could not be considered. 16. Ld. AR submitted that audited annual report of Akshay Software Technologies Ltd for F. Y. 2010-11 was available in public domain. According to him such results for F. Y. 2010-11 also reflected the financial results for the financial year ending 31.03.2010. Relying on Annexure -F placed at page 25 of the paper book, Ld. AR submitted that RPT of the said company was clearly shown as a part of its Schedule 14, being notes to the audited financial statement. As per the Ld. AR, related party transactions for F. Y. 31.03.2010 was ₹ 47,05,640/- against which the actual income from software service for the said year was ₹ 10,86,57,547/-. This as per the Ld. AR worked out to 4.33% only. Such figures being available in public domain, according to the Ld. AR, it was not appropriate to reject Akshay Software Technologies Ltd from the list of comparables. 17. Per contra, Ld. DR submitted that the figures submitted by the assessee, though stated as available in public domain, still required verification. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion System, Ld. AR.submitted that assessee had specifically objected before the TPO dissimilarity. As per the Ld. AR, Delhi Bench in the case of Qualcom India (P.) Ltd. v. ACIT [IT Appeal 5239 (Delhi) of 2010, dt.10.06.2013] had held that Kals Information Systems Ltd was into development of software products and services and was not comparable with a software development services concern. As per the Ld. AR the same view was taken by a coordinate bench of this Tribunal in the case of Trilogy E Business Software India (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540 Ld. AR submitted that the audited final accounts and annual report of Kals Information Systems Ltd, for F. Y. 2009-10 was available in public domain and placed as Annexure-A of the paper book. Placing reliance on Schedule 14, Ld. AR submitted that income of the said company was from software services, software products and training and it had inventories which would go to show that the said company was engaged more in software product development than in software development services. Thus according to him, Kals Information Systems Ltd was not a proper comparable. In any case, according to him, when segmental results were not avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.03.2010 of the said company : 1. Background The company was incorporated under the Companies Act, 1956 as a Private Limited Company in the year 1993. Subsequently the company was converted into a public limited company in the year 2000. The company is engaged in development of Software and Software products since its inception. The company consisting of STPI unit engaged in Development of Software and Software products and a Training Centre engaged in training of Software professionals on online projects. 2. Summary of Significant Accounting Policies (a) Basis of Accounting: The financial statements are prepared under the historical cost convention on accrual basis of accounting to comply with the accounting standards prescribed in the Companies (Accounting Standards) Rules, 2006 and with relevant provisions of the Companies Act, 1956. (b) Revenue Recognition: The Company derives its revenues primarily from software services and software products. Revenue from time and material contract is recognized on the basis of software developed and billed in accordance with the terms of the contract. Revenue from the fixed price contract is recognized on the completion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tics and business process outsourcing. (c) Revenue Recognition:- (i) Revenue from services consists of revenue earned from services performed for software development consultancy, licensing sub-licensing fee web development and hosting which is recognized to the extent services are performed. (ii) Revenue from Sales is recognized as and when delivery of the branded software's is made and is booked net of trade discount. 26. Ld. AR has also relied on Safe Harbour Rules notified by CBDT, dt.l8.09.2013. Said Safe-Harbour Rules has given definition of what could be considered as ITES. This is reproduced hereunder: (e) information technology enabled services means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:- (i) back office operations; (ii) call centres or contact centre services; (iii) data processing and data mining; (iv) insurance claim processing; (v) legal databases; (vi) creation and maintenance of medical transcription excluding medical advice; (vii) translation services; (viii) payroll; (ix) remote maintenance; (x) revenue accounting; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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