TMI Blog2015 (12) TMI 1753X X X X Extracts X X X X X X X X Extracts X X X X ..... USA. The assessee exports its entire output to its parent company (SNC) on Cost + 10% mark up. The assessee has its establishments in the approved Software Technology Parks located at Pune and Bangalore. Hence, the assessee is entitled for the benefit u/s. 10 of the Act. The assessee filed return of income for the assessment year 2007-08 on 29-10-2007 declaring its income at ₹ 42,20,130/- after claiming exemption u/s. 10A of the Act. During the assessment proceedings, the income of the assessee was enhanced to ₹ 5,68,15,190/- by virtue of addition of ₹ 5,25,95,056/- on account of adjustment made to arm's length price of International Transactions with Associated Enterprises (AE). 3. During the period relevant to the impugned assessment year the assessee had entered into International transactions for rendering software development services with its AE to the tune of ₹ 31,30,40,056/-. To benchmark the same, the assessee adopted CPM method. The TPO after examining the documents submitted and the benchmarking done by the assessee in respect of international transactions rejected the same. The assessee had originally selected 27 comparables. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO and rejected the objections filed by the assessee. Based on the directions of DRP, the Assessing Officer made addition of ₹ 5,25,95,056/- on account of adjustment made to ALP of the international transaction with AE. Assailing the assessment order and the directions of the DRP, the assessee is in appeal before the Tribunal. 6. The grounds raised by the assessee in appeal are adjudicated in seriatim as under :- Ground No. 1 - Transfer pricing adjustment Erred in making transfer pricing adjustment by rejecting the analysis undertaken by the Appellant to determine arm's length price for its international transactions pertaining to provision of software development services to the AE. Ground No. 2 - Rejection of transfer pricing analysis conducted by the Appellant Erred in rejecting of the economic analysis conducted by the Appellant and rejecting the comparable companies indentified by the Appellant in the TP Study. The ground Nos. 1 and 2 raised in the appeal are general in nature and thus, requires no adjudication. 7. Ground No. 3 - Eligibility under section 10A of the Act : Erred in ignoring the fact that since Appellant is availing tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of TIBCO Software India (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 91 (pune) wherein it has been held that testing is part of software development. As regards Synfosys Business Solution Ltd. the ld. AR submitted that the company should be considered as comparable entity as it is engaged in software development services. The TPO has considered wrong figures in respect of expenditure towards remuneration and salary paid to the employees of the company. The ratio of personnel expenses to total expenses in the case of said company is more than 77%. 9. On the other hand Dr. Harshvardhini Buty representing the Department vehemently supported the findings of DRP and TPO. The ld. DR submitted that Object One Information Systems Ltd. is engaged in software development, media business, internet TV etc. The segmental information for software services is not available in respect of the said company. Therefore, the company is not functionally comparable. In respect of Quintegra Soutions Ltd. the ld. DR contended that the company is engaged in management, product engineering, enterprise solution such as SAP, testing and validation, technology consulting, etc. The company has diversified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Dy. DIT [IT Appeal No. 1670/PN of 2011] ii. PTC Software (India) (P.) Ltd. v. Asstt. CIT [2012] 28 taxmann.com 412 (Pune) 11.1 In respect of Kals Information Systems Limited (Seg) the ld. AR submitted that the company is functionally different as compared to the activity of the assessee. The said company is engaged in the development of software and software products. Segmental information is respect of income generated from different activities of the company is not available in public domain. The ld. AR referred to the balance sheet of Kals Information Systems Ltd. at pages 594 to 602 of the paper book. The ld. AR pointed out that the inventory shown in the balance sheet is generated from software products. In case of software services no inventory is generated. Therefore, the said company cannot be considered as a good comparable. The ld. AR further submitted that Kals Information Systems Ltd. has been rejected as comparable by the Tribunal in the following decisions:- i. SunGard Solutions (India) (P.) Ltd. (supra) ii. PTC Software (India) (P.) Ltd. (supra) iii. Barclays Technology Centre India (P.) Ltd. v. Asstt. CIT [2015] 56 taxmann.com 386 (Pun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been wrongly applied to include the two companies. In this regard we find that in the Transfer Pricing study undertaken by the assessee it had not applied the filter of RPT for the purposes of eliminating cases having related party transactions. In the course of transfer pricing proceedings, the assessee on being asked, stated that the RPT filter be applied to exclude cases from the list of comparables where the RPT transactions exceed 10% of the total transactions. The TPO however, decided to identify the companies where the quantum of RPT is more than 25% calculated with reference to the appropriate base, and excluded the same for the purposes of comparability analysis. Notwithstanding the assessee's 6 primary plea that the threshold limit of 25% adopted by the TPO was inappropriate, it has been submitted before us that even after applying the filter adopted by the TPO, the aforestated two concerns are liable to be excluded as they have related party transactions in excess of 25% of the total transactions. It has been pointed out that the RPT percentage has been wrongly calculated by the TPO and for that matter it referred to the detailed submissions made in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nil sales revenue from related parties against total sales of 23.82 crores, but has incurred RPT expenses of ₹ 6.65 crores against total expenses of 17.78 crores. The ratio of RPT to total transactions has been computed at 15.19% by the TPO. Again the TPO has adopted the denominator of ₹ 41.60 crores inclusive of total sales whereas the numerator is ₹ 6.65 crores, comprising of only RPT expenses and no RPT sales. Therefore, the denominator is to be corrected at ₹ 17.78 crores and the correct percentage of RPTs would be 37.40%, i.e., RPT expenses/total expenses. The RPTs being in excess of the 25% filter adopted by the TPO, the said concern in our view is also liable to be excluded from the list of comparables for the purpose of comparability analysis. In the present case the assessee is seeking rejection of Compucom Software Ltd. from the list of comparables on the ground of excessive RPT. Respectfully following the decision of Co-ordinate Bench, we direct the Assessing Officer/TPO to exclude the said company from the list of comparables. 13.1 As far as Kals Information Systems Limited is concerned the contention of the assessee is that it is functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was that the said concern was engaged in selling of software products, namely, Virtual Insure, La. Vision, CMSS, e- DMS and ERP SHINE , etc., which are all specialised software products developed for the respective sectors. For the instance, Virtual Insure was said to be a web based solution that was useful in the insurance sector; La Vision was an e-commerce based application in the field of intra-organizational communications, etc.; and, CMSS was a software for consultants/agents to manage their customers pre and post sales. On this basis, it was sought to be made out that the assessee was functionally different inasmuch it was engaged in the provision of software development and other related services to its associated enterprises as well as to the non-associated enterprises and, was not involved in development and sale of software products. The TPO did not accept the plea of the assessee for the reason that the Annual Report of the said concern did not reflect about sale of software products after development and therefore, according to him, it was not functionally different. 14. Before us, the learned counsel for the assessee has vehemently pointed out that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year as is in the present case and therefore the said decision also squarely applies to the facts of the present case. 16. The learned CIT-DR has defended the position of the TPO by relying on the discussion in the order of the TPO, which we have already adverted to in the earlier part of this order, and is not being repeated for the sake of brevity. 17. We have carefully considered the rival submissions. We find that the precedents by way of the decision of the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) and the decision of the Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) relied upon by the assessee squarely cover the controversy relating to Kals Information Systems Limited. In the aforesaid two precedents, the said concern has been sought to be excluded from the list of comparables on account of functional dissimilarities. The Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) has considered the functions undertaken by the said concern during the previous year relevant to the assessment year under consideration before us, and it has been found that the said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name DXchange , it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- 7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Net Hawk Networks India (P.) Ltd. (supra). The ld. DR has not been able to distinguish the decision of the Tribunal, nor any material has been brought on record to enable us to take a different view. Respectfully following the decision of Co-ordinate Bench we excluded Avani Cimcon Technologies Limited from the list of comparables in the present case as well. 13.3 In view of the facts of the case and the case laws discussed above, ground No. 7 raised in the appeal of assessee is allowed. 14. Ground No. 8 - Adopting inappropriate approach of selection of companies as comparables : Erred in adopting inappropriate approach of selecting certain additional companies (discussed in Ground 7 above) as comparable to the Appellant and ignoring companies which could also be considered as comparable to the Appellant on the same basis. In respect of ground no. 8 the ld. AR of the assessee submitted that the assessee has raised objections before the DRP for adopting inappropriate approach of selecting companies as comparables. However, the DRP has not given any findings on the issue. A perusal of the directions of DRP show that the assessee had raised this issue as Objection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2013] 36 taxmann.com 501/[2014] 147 ITD 388 (Pune) and in support of risk adjustment the ld. AR placed reliance on following case laws: i. Intellinet Technologies India (P.) Ltd. v. ITO [2012] 22 taxmann.com 28/53 SOT 92 (URO) (Bang.) ii. Curam Software International (P.) Ltd. v. ITO [2013] 137 taxmann.com 141/[2014] 149 ITD 458 (Bang.) The ld. DR submitted that the DRP has admitted that working capital adjustment cannot be denied. However, the assessee did not furnish the necessary documents in support of its submissions. Similarly, for risk adjustment the assessee failed to provide necessary information. A perusal of directions of DRP shows that the issue of working capital adjustment and risk management has been summarily rejected by the DRP. The ld. AR pointed that working capital adjustment has been allowed in the subsequent assessment years i.e. assessment years 2009-10 and 2010-11. The ld. AR referred to the order of TPO dated 23-01-2013 for assessment year 2009-10 at page 1159 to 1197 of the paper book and the directions of DRP dated 23-12-2014 for assessment year 2010-11 at page 1199 to 1241 of the paper book. The assessee has ostensibly given detailed ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
