TMI Blog2018 (12) TMI 1665X X X X Extracts X X X X X X X X Extracts X X X X ..... D activities leading to the creation of significant intangible property and the fact that Infosys is a brand in itself and the fact that it assumes entrepreneurial risk and it also deals in software product and following the decision rendered in CIT vs. Agnity India Technologies Pvt. Ltd. [ 2013 (7) TMI 696 - DELHI HIGH COURT] it cannot be taken as a valid comparable. So, we direct the AO/ TPO to exclude Infinite from the final set of comparables. PERSISTENT SYSTEMS LIMTIED (PERSISTENT) - we are of the considered view that Persistent is not a valid comparable vis- -vis taxpayer. So, we direct the AO/ TPO to exclude Infinite from the final set of comparables. SONATA SOFTWARE LTD. (SONATA) - when we examine Related Party Transactions of Sonata, available at page 726 of the paper book, it goes to prove that its RPT as percentage of sales is 53.83% whereas TPO himself has applied the filters to exclude the companies with more than 25% of RPT from the final set of comparables. So, keeping in view the functional dissimilarity as well as substantial Related Party Transactions, Sonata cannot be a valid comparable vis- -vis taxpayer, hence ordered to be excluded. TATA ELXSI - As r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. 3. On the facts and circumstances of the case, the learned Assessing Officer has erred both on facts and in law in making an addition of ₹ 91,44,831/- as difference in arm's length price. 4. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in including the following comparables, despite the appellant company bringing sufficient material and evidences on record to the effect that line of activities of these com parables is totally different from that of line of activities of the assessee company: i) Infinite Data System Private Limited ii) Infosys Limited iii) Persistent Systems Limited iv) Sonata Software v) Tata Elxsi vi) Zylog Systems Limited vii) Thirdware Solutions Limited 5. On the facts and circumstances of the case, the learned DRP has erred in rejecting the contention of the assessee that the inclusion of Infosys Limited and Sonata Software is bad in law as the same are not comparable with the assessee. 6. On the facts and circumstances of the case, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaining to the current year. 12. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in rejecting the calculation of the assessee for making appropriate adjustment to account for varying risk profiles and difference in working capital of the assessee vis-a-vis com parables. 13. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in rejecting the contention of the assessee that the benefit of arms' length range of +/- 5% be given in view of proviso to Section 92C(2) of the Act. 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Lime Labs (I) Pvt. Ltd., the taxpayer s 99.99% shares were held by Lime Labs India Holdings A LLC, USA whereas balance 0.01% shares were held by Lime Labs India Holdings B LLC, USA. The taxpayer is involved into providing software development support services for the Lime Domains, Lime Wire and Lime Exchange Lines of business as per specifications provided by the Associated Enterprises (AEs). The taxpayer is providing AEs with prototype software for quality testing and approval. On the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chosen by the taxpayer and introduced 7 new comparables which are as under :- S.No. Name of the Company OP/OC 1. Akshay Software Technologies Ltd. -1.07% 2. Infinite Data System Private Limited 88.25% 3. Infosys Limited 45.47% 4. Mindtree Ltd. (Segment) 13.92% 5. Persistent Systems Limited 29.02% 6. Quintegra Solutions Ltd. -8.20% 7. R S Software (India) Ltd. 10.18% 8. Sonata Software 35.87% 9. Tata Elexi (Segment) 20.29% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne revenue recognition of Infinite it shows that primarily it derives its revenue from technical support and infrastructure management services whereas the taxpayer is driving its revenue from software development support services. Infinite is also into rendering technical consultation, design development of software, maintenance system integration, implementation, testing infrastructure, management services and its segmental information is not available, whereas the taxpayer is into providing routine software development support services to its AE. 14. The taxpayer placed reliance on decision rendered by coordinate Bench of the Tribunal in DCIT vs. Exchanging Technology Services India Ltd. (ITA No.121/Del/2015) wherein Infinite was ordered to be excluded being not a valid comparable vis- -vis Exchanging Technology which was a routine software development support services provider. 15. Furthermore, it is brought on record by the taxpayer that the profitability of Infinite is increased by 1496% as compared to the preceding year despite the fact that for computation of OP/OC, foreign exchange loss has been excluded from OC. So, we are of the considered vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100% services are provided to AEs Nature of Services Diversified-consulting, application design, development, re engineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book Contract Software Development Services. Revenue ₹ 9, 028 Crores ₹ 16.09 Crores Ownership of branded/ proprietary pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondentassessee 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. 19. Keeping in view the functional dissimilarity between Infosys vis- -vis the taxpayer and the fact that Infosys is incurring huge expenditure to the tune of 2.1% of its total revenue on its R D activities leading to the creation of significant intangible property and the fact that Infosys is a brand in itself and the fact that it assumes entrepreneurial risk and it also deals in software product and following the decision rendered by Hon ble Delhi High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra), it cannot be taken as a valid comparable. So, we direct the AO/ TPO to exclude Infinite from the final set of comparables. PERSISTENT SYSTEMS LIMTIED (PERSISTENT) 20. This is again TPO s comparable which has been challenged for exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id comparable vis- -vis taxpayer. So, we direct the AO/ TPO to exclude Infinite from the final set of comparables. SONATA SOFTWARE LTD. (SONATA) 24. This is again TPO s comparable who has chosen the same on the ground that it is also a software development services provider. The taxpayer sought to exclude the same on ground of functional dissimilarity as well as on ground of substantial Related Party Transactions (RPT). When we examine functional profile of Sonata, available at page 742 of the paper book, it goes to prove that Sonata is primarily engaged in development of software product and it also provides Information Technology (IT) solutions, IT consulting, Development services globally, enhancing competitive advantage of its customers. The company also provides both onsite as well as offshore services in the area of RP customization conversion and migration projects, data warehousing, Business Intelligence, Web Development, Infrastructure Management amongst others. 25. Furthermore, when we examine Related Party Transactions of Sonata, available at page 726 of the paper book, it goes to prove that its RPT as percentage of sales is 53.83% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. NEC Technologies India Ltd. (supra,) Toluna India Pvt. Ltd. and Telcordia Technologies India Pvt. Ltd. (supra) Tata Elxsi is being functionally dissimilar vis- -vis tax payer is ordered to be excluded from the final list of comparable for benchmarking the international transactions. ZYLOG SYSTEMS LIMITED (ZYLOG) 30. This is again a TPO s comparable which the taxpayer has sought to exclude on ground of extraordinary event that it has acquired directly M/s. Matrix Primus Partners Inc., USA, M/s. Algorithm Solutions Private Limited, India and acquired M/s Brainhunters Inc. Canada. 31. Perusal of the annual report available at page 457 goes to prove that Zylog has acquired directly M/s. Matrix Primus Partners Inc. USA, M/s. Algorithm Solutions Private Limited, India and acquired M/s. Brainhunters Inc., Canada, through our WOS Zylog Systems (Canada) Ltd., during the Financial years 2009-10 relevant for year under assessment in case of the tax payer. 32. Furthermore the Zylog has invested in acquiring this business an amount of ₹ 62,12,04,848/- and has adopted the policy of amortizing this amount over a period of 5 years. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,633/- c) Revenue from subscription - ₹ 1,53,13,736/- d) Sale of licences- ₹ 1,51,38,618/- e) Sale of software services - ₹ 5,72,23,072/- ₹ 67,56,06,505/- From the above it is not clear as to what constitutes the sale of exports, whether it is product or software development services. Revenue from subscription and sale of licence also indicate that there is income from products also which would indicate different business model and consequently the profit margin. Without any ITA 7078/Del/2014 A.Y. 2010-11 M/s Open Solutions Services Pvt.Ltd. proper segmental information regarding revenues from software development and software products, it would be very difficult to accept that the proper comparability analysis can be carried out with the assessee which is purely providing software development services. Apart from above ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
