TMI Blog2017 (2) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... Design Automation India Private Limited, the assessee, is a subsidiary of Magma Design Automation Inc, USA during a y 2009- 10, engaged in providing software development -services, customer support services ( CSS ) and sales support services to its Associated Enterprises for which it is remunerated on a cost plus basis. It operates from 3 units, Bangalore (STP unit claiming deduction u/s10(A), Noida (SW unit claiming deduction u/s 10A) and Mumbai (non STP unit). 03. The facts, in brief, relevant to this appeal are that for the a y 2009-2010, the assessee filed its return on 30 September 2009, declaring a taxable income of ₹ 391, 81, 690 under the normal provisions. On a reference to the TPO, the, TPO passed an order dated 8th January 2013 determining an adjustment of ₹ 5, 46, 76, 721 ₹ 1, 15, 99, 315 in respect of the software development services the CSS transactions, respectively. Thereafter, the AO has considered the ALP determined by the TPO and passed an order which resulted in an addition of ₹ 6, 62, 76, 036 to the total income of the assessee. The assessee challenged this order before the CIT (A), inter alia, on functional dissimilarity of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sl. No. Name of the Co. PLI %age Basis for seeking exclusion. 1. M/s Kals Information Systems Ltd., 13.89 Functional Dissimilarity 2. M/s Bodhtree Consulting Ltd., 62.27 3. M/ Tata Elxsi Ltd., 20.28 4. M/s Persistent systems Ltd., 41.40 5. M/s Infosys Tech. Ltd., 45.61 In addition to this, the assessee has also requested in the chart for consideration of correct operating margin in the case of M/s Sasken Communication Tech Ltd., and M/s Larsen Toubro infotech Ltd. 12. Regarding the first aspect i.e. exclusion of some comparables on the basis of functional dissimilarity we deal this issue company wise as under; 1) M/s Kals Information Systems Ltd., For exclusion of this company, reliance has been placed on the Tribunal order rendered in the case of M/s Onward technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using latest technology and therefore, the same cannot be considered as a comparable in the case of companies rendering software development services, as in the present case. Therefore, by respectfully following this Tribunal order, we hold that this company is also excluded from the list of final comparables. 3. M/s Tata Elxsi 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 our attention was drawn to para- 26.4 to 26.5 of the order available on pages 103 to 105 of the case law compendium. For the sake of ready reference these paras are reproduced hereunder; 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of ₹ 230 crores in the total segment revenue of ₹ 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% ( 75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO. Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta Elxsi Ltd., was developing niche products and into product designing services. Hence, these companies would in any case have to be excluded from the comparables being functionally different . 37. Following the said decision, we direct that Persistent Systems Ltd., be excluded from the final list of comparable companies chosen by the TPO . The ld. DR of the revenue supported the orders of the authorities below. 16. We have considered the rival submissions. We find that in this case, the Tribunal has followed another Tribunal order rendered in the case of M/s Yodlee Infotech Ltd., Vs ITO in IT(TP)A No.108(Bang)/2014. The relevant portion of that Tribunal order is reproduced above and as per the same, this company i.e. M/s Persistent Systems Ltd., was in product designing services and into software product development. Since the present assessee company is only providing software development services to the AE, this company cannot be considered as a comparable in the present case. Since the ld. DR of the revenue could not point out any difference in facts, by respectfully following this Tribunal order, we direct the AO/TPO for exclusion of this company from the final list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... After exclusion of these 5 companies, arithmetic mean of the remaining 6 companies (comparables) will be only 14.02% as against PLI of the tested party i.e. the assessee company 17.63% and as a result no, TP adjustment is called for after exclusion of these 5 comparables and therefore, we do not 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. Following the above order, we direct the TPO /AO to exclude the above 5 comparables on functional dissimilarity. 06. The next issue is seeking correction in the margin computation of two comparables viz Sasken Communications Services Ltd Larson and Toubro Infotech Ltd. In this regard, the gist of the AR s submissions is extracted as under : Sasken Communication Technologies Ltd : The TPO held that it is functionally comparable, satisfies all the filters and retained it as a comparable. However, the assessee submitted that this company has to be rejected for the reason that the margins are erroneously computed, took us through pages 282, 327 328 of the paper book and furnished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia P Ltd in IT(TP)A.27/Bang/2014 dt 14.8.2014. Goldstone Technologies Ltd; The TPO held that it is functionally different and engaged in ITeS. The assessee submitted that this company is engaged in software development services. Further, it is pleaded that this company; is functionally similar, qualified all the filters and hence should be held as a comparable. Placed reliance on the decision in Cisco systems India P Ltd in IT(TP)A.27/Bang/2014 dt 14.8.2014. Quintegra Solutions Ltd : The TPO held that this company fails export turnover filter which is less than 75%. The assessee submitted that its export earnings is 95%, functionally similar and qualified all the filters applied by the TPO and hence it should be held as a comparable. Placed reliance on the decision in Cisco systems India P Ltd in IT(TP)A.27/Bang/2014 dt 14.8.2014. The relevant portion of the order is extracted as under : 27.8 CG-Vak Software Exports Ltd. (D) (i) As far as this company is concerned, the TPO rejected the same by applying the 25% employee cost filter. According to the TPO, usually software development services are high-end services performed by skilled and professional employees an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had sought for risk adjustments, but the same has not been considered by the TPO. In this regard, our attention was drawn to the following submissions made before the revenue authorities:- 17.1 The Appellant functions under a limited risk environment with most of the risk being assumed by its AE. The Appellant bears lesser limited business risks than independent comparable companies due to the nature of its revenue model as it is guaranteed profits by way of a mark-up on costs incurred, in provision of the software development services. However, the independent companies have to bear the vagaries of the economic and business factors that are prevailing in the industry and thus could either incur losses or earn profits based on market conditions. 17.2 Rule 10B(1)(e)(iii) of the Rules provides that an adjustment should be made to the profit margin of independent comparable companies to take into account the differences in functions and risks. The OECD Transfer Pricing guidelines also recognize adjustments to be made to account for differences between controlled and uncontrolled situations that would significantly affect the price charged or return required by independen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment on account of risk level. As per the provisions of Rule 10B(3), if any adjustment should be made, it should be reasonably accurate to eliminate the material effects of such differences. But in case of risk adjustment, neither reasonably accurate adjustment can be made for want of method to do so nor has it been established that there is a material effect that is affecting the comparisons due to risk level. If the taxpayer is suggesting that there exists a difference in the risk level assumed by the tested party and uncontrolled comparables, it is academic in nature and not based on any study whose results has been validated. It is not out of place to reiterate that single customer risk is a huge risk which the uncontrolled comparables are not assuming. By having more customers, the risk is shared or spread. In other words, if one customer goes out of business still there are others which will sustain the business of the tested party. But in case of the taxpayer there being only one client, the entire risk is concentrated on one client, and therefore. if the client is out of business the taxpayer will also be out of business. Earlier the argument given about the country risk wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t material. We deem it fit to remit these issues to the TPO/AO for a fresh re-adjudication. While doing so, the assessee shall have to be given due opportunity to present its case. 07. With regard to the second segment i.e. Customer Support Services, the AR of the assessee submitted that out of 8 comparables chosen by the assessee, the TPO retained 5 comparables only and introduced another 3 comparables. Out of which, the assessee is seeking exclusion of 5 comparables on functional dissimilarity and correction in the margin computation of two comparables viz Microland Ltd Aditya Birla Minacs Worldwide Ltd. Further, it submitted that 2 comparables chosen by the assessee were erroneously rejected by the TPO and seeks to include them as comparables. In this regard, the gist of AR s submissions are as under: Microland Ltd : The TPO held that this company is functionally comparable, satisfies all the filters and hence retained it as a comparable. The assessee submitted that it is engaged in IT Infrastructure Management services and ITeS services. The TPO has considered KPO services such IT Infrastructure management as well, while computing the margins. However, only ITeS operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered in that case as under, at para 5 of its order dt.31.07.2014 : 5. Even though there is no dispute with reference to the method adopted, the TPO rejected the documentation maintained by assessee on the reasons that multiple year data was used; has not applied export filters properly; and also selected some of the companies which are not functionally similar. After analyzing the reasons, vide para 7 of the TPO's order, the TPO undertook fresh search of comparables and after detailed analysis, gave a show cause notice to assessee for its objections to the selection of 14 comparables. Ultimately, the TPO determined the following twelve companies as comparables and arrived at the average Profit Level Indicator (PLI) of 27.42%, as per the details tabulated hereunder- Sl. Company Name Operating Revenue PBIT/ Cost% 1. Accentia Technologies Limited 78.73 49.40 2. Acropetal Technologies Ltd. (Seg.) 33.13 25.01 3. Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are of the opinion that only the results of the segment relatable to ITES can be considered for comparison while analysing the ALP of the ITES segment of the assessee. Ordered accordingly. 32. With respect of Accentia Technologies Ltd., it was held as under, in the case of Capital IQ Information Systems (India) P. Ltd., at para 21 to 22 of its order : Accentia Technologies Limited. 21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumstances and brand value. The same in these circumstances cannot be selected. It was submitted that assessee was in medical transcription services. 21.1. The Departmental Representative however, objected to the pleas of assessee stating that the extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration. 21.2 We have considered the rival contentions and noticed that this company oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at ₹ 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at ₹ 9.90 lacs, Translation charges at ₹ 6.99 crore and Accounts BPO at ₹ 27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly inthe realm of the Translation segment, revenues from which are to the tune of ₹ 6.99 crore. If this segment of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ACIT (ITA No.7466/Mum/2012 for assessment M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this company cannot be selected as a comparable. 18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded. 18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company. We, therefore, hold that the said company also be excluded from the list of comparables . Following the above order, we direct the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The company has purchased Mutual fund units approx 165% of its revenue. - The company itself has categorised the closing balance under the Current investments, showing intention to sell / trade the said outstanding balance of securities as well. - Though the activity of trading is not shown as a separate segment, the volume of the transactions clearly depict the intention of the company to trade in securities and earn profits in the said activity. In the assessee s case in ay 2007-08 [ITA No.1214/Bang/2011, this Tribunal rejected it as a comparable. We heard the rival submissions and gone through relevant material. This Tribunal excluded these two comparables in the assessee s case in ay 2007-08 based on the decision of this Tribunal in AOL Online India P Ltd in IT(TP)A No 1036 /Bang/2011 dt 18.3.2016 which highlighted almost the above reasons, on which the assessee is seeking exclusion, supra, and the allowed the appeal. Since the facts are similar, following the above decisions, we direct the TPO/AO to exclude them as comparables. 11. The next issue is seeking inclusion of 2 comparables chosen by the assessee, but erroneously rejected by the TPO. In this regard, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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