TMI Blog2017 (3) TMI 1787X X X X Extracts X X X X X X X X Extracts X X X X ..... er the foreign exchange fluctuation was included as operating margin in the case of comparables ? - HELD THAT:- We are of the view that similar treatment should be given in the case of tested parties and the comparables. If the foreign exchange fluctuation is included in the case of comparables, it should also be included in the case of tested parties. Therefore, we are of the view that these facts should be verified by the AO. Accordingly, we set aside the order of the CIT(A) and restore the matter to the file of the AO to verify whether foreign exchange fluctuation was included in the operating margin of the comparables. If the assessee succeeds in establishing that foreign exchange fluctuation was included in the operating margin of the comparables, the same may be included in the case of tested parties also. TP Adjustment - comparable selection - HELD THAT:- Assessee provides information technology services and IT enabled services to its Associated Enterprises thus companies functionally dissimilar with that of assessee need to be deselected from final list and also who fails RPT filter approved . - IT(TP)A No.1298/Bang/2013, CO No. 13/Bang/2016 Assessment years : 2005-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the use of this filter ensures that the transactions which are compared took place during the same period / financial year as held by the decision of the Pune bench in the case of' Honeywell Automation India Ltd. V. DCIT in ITA No. 4/PN/08 dated 10.02.09 and reported in 09-TIOL- 104. 7. The CIT (Appeals) erred in directing the AO to exclude Geometric Software Solutions Ltd., Tata Elxsi Ltd., and Bodhtree Consulting Ltd., from the list of comparables as being functionally different without appreciating the fact that the companies qualify all the qualitative and quantitative filters applied by the TPO. 8. The CIT (Appeals) erred in holding that Vishal Information Technology Ltd. cannot be taken as a comparable relying on the decision of the ITAT in the assessees own case for the A.Y 2006-07 without appreciating the fact that the company qualifies all the qualitative and quantitative filters applied and that the decision of the ITAT has not reached a finality as an appeal under Section 260A is pending on the said issue. 9. The CIT (Appeals) erred in directing the AO to exclude Nucleus Net Soft and GIS_Ltd. from the final set of comparables without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that by making the payment towards club membership fees, the assessee did not acquire any enduring benefit as it was obtained on account of commercial expediency. Reliance was placed upon the judgment of the Mumbai High Court in the case of Otis Elevators Vs. CIT 195 ITR 682 (Bom) and other judgments of different High Courts. 5. Having carefully examined the orders of the lower authorities, we find force in the contention of the assessee that since the assessee has obtained the club membership for commercial expediency; the same is to be allowed as business expenditure. We therefore find no infirmity in the order of the CIT(A). Accordingly, we confirm the same. 6. Ground No. 10 relate to the inclusion of foreign exchange fluctuation in operating margin. In this regard, our attention was invited that it is not clear whether the foreign exchange fluctuation was included as operating margin in the case of comparables. Under these circumstances, we are of the view that similar treatment should be given in the case of tested parties and the comparables. If the foreign exchange fluctuation is included in the case of comparables, it should also be included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal before the Tribunal. During the course of hearing, the learned counsel for the assessee invited our attention to the fact that the assessee Google India Pvt. Ltd., provides information technology services and IT enabled services to its Associated Enterprises ( AEs ). During the impugned assessment year, international transactions with its AEs undertaken by the assessee are as under: International Transactions Value (INR) Software development service 12,88,92,858 IT Enabled service income 14,31,25,166 Purchase of capital assets 5,29,01,598 Advance received interest free 1,22,11,929 Reimbursement of expenses 7,10,35,365 11. The learned counsel for the assessee further contended that ALP adjustment was made in both the segments i.e., Software Development Services and IT enabled services. 12. We therefore are of the view that the issue of ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iak Networks India Ltd., where the assessee is also engaged in providing software development services to its AE. 14. With regard to Bodhtree Consulting Limited, the learned counsel for the assessee has contended that besides functional dissimilarity, this comparable fails on RPT filter as related party transaction in this case is 35%. 15. The learned DR however contended that the rejection of this comparable is not proper and therefore can be included in the list of comparables. 16. Having carefully examined the functional profile of Bodhtree Consulting Limited and its related party transactions, in the light of judgment of ACIT Vs. McAfree Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., we find that the Tribunal has categorically held in the case of McAfree Software (India) Pvt. Ltd., whose profile is similar to the assessee s profile, that Bodhtree Consulting Limited is functionally different and also fails on RPT filter as it is more than 25%. The relevant observation of the Tribunal in this regard is extracted hereunder: Bodhtree Consulting Ltd.,: 10.3. This company was retained by Ld.CIT(A) but Assessee objects on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware (India) Pvt. Ltd. and Kodiak Networks India Ltd., in which the Tribunal has held that Four Soft Ltd., is functionally dissimilar and RPT is at 19%. With regard to Geometric Software Solutions Limited, it was also held that this comparable is functionally dissimilar. Similar is the position with regard to Tata Elxsi. The relevant observations of the Tribunal in the case of McAfee Software (India) Pvt. Ltd. are extracted hereunder: Sankhya Infotech Ltd., Thirdware Solution Ltd., Tata Elxsi Ltd., : 10.5. These three companies are rejected as comparables on functionality in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (paras 19- 20, 22-26, 27-30 restively) and in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) at Para No. 13. The analysis by the Co-ordinate Benches is as under: Sankhya Infotech Limited ('Sankhya') 19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products services and training. The company focuses on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- 15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product developments. Since Assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the Assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005- 2006 order dated 12.2.2014. 28. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: 15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and Assessee's objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to Assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, Assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee. 30. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies. 13. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not IT(TP)A Nos. 04/Bang/2012 1388/Bang/2011 discussing above comparables in detail, but, suffice to say that Assessee's submissions are valid. The AO is directed to exclude the above comparables and re- work out the arm's length margin accordingly. The ground No.8 and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Tribunal and has categorically held that these comparables are not good comparables for determining the ALP in the case of McAfee Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., whose profile is similar to assessee s profile, we find no justification to re-examine the profile of these comparables again. We therefore hold that Sankhya Infotech Ltd., Four Soft Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd., are not good comparables. Therefore they have to be excluded from the final list of comparables. We accordingly confirm the order of the CIT(A) with respect to exclusion of Bodhtree Consulting Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd. Since the CIT(A) has taken Sankhya and Foursoft Ltd., in the list of comparables, we set aside the order of the CIT(A) and direct the AO to exclude these comparables from the final list of comparables. After the exclusion of these comparables, left out comparables, Lanco Global Systems Ltd., Sasken Networks, R. S. Software (India) Ltd., Visualsoft Technologies and Sasken Communications Ltd., be taken in the final list of comparables for determination of the ALP for the software development service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion of Vishal Information Technologies Limited is, therefore, justified. 6. The only contention regarding the exclusion of Nucleus Netsoft and GIS (India) Limited is that there is no reasoning. This, however, is not even a ground taken in the appeal filed before us. In any event, we perused the 22nd annual Report for the year 2005-06 of Nucleus Netsoft and GIS (India) Ltd. Schedule 12 furnishes the operating other expenses. The data processing charges are ₹ 1.04 crores out of the total operating other expenses of about ₹ 2.41 crores. Thus, an amount of over 40% is outsourced. The finding of the Tribunal, therefore, cannot be held to be perverse. 21. These comparables were also examined by the Tribunal in the case of Genesis Integrating Systems India Pvt. Ltd. A copy of order is placed on record at page Nos. 65 to 79 of the compilation in which the Tribunal has examined the profile of Vishal Information Tech Ltd., and Nuclues Netsoft GIS Ltd. The relevant observations of the Tribunal in this regard are extracted hereunder: 20. Ground no.3 4 challenges the directions of the learned CIT(A) deleting the comparable of M/s Vishal Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Special Bench of the Tribunal in Maersk Global Centres (Ind.) Pvt. Ltd (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases, a classification of BP0 and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower- end ITEs such as call centres etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold . Furthermore, the company operating margin is 50.68% which is considered to be abnormal, in the line of business it is engaged. Therefore, it cannot be considered as a comparable in the light ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para-13 accepted assessee's contention that the company outsourced its work and has held that the company cannot be selected as a comparable on account of its low employee cost. In view of such order of the co-ordinate bench, we direct the AO/TPO to examine this aspect and if there is substantial difference between the assessee the aforesaid company, then this company cannot be treated as a comparable . Respectfully following the co-ordinate bench decision, we hold that the learned CIT(A) is justified in giving direction to delete M/s Nucleus Netsoft GIS Ind. Ltd. as a comparable. Hence, this ground of appeal filed by the revenue is dismissed. 22. Since the Tribunal has examined the profile of these comparables and is of the view that these comparables are not good comparables for computing the ALP, we find no justification to readjudicate the profile of these comparables again. We therefore confirm the order of the CIT(A) who has rightly excluded these comparables. Accordingly, the order of the CIT(A) is confirmed with respect to IT enabled services segment. Accordingly, the AO/TPO is directed to recompute the ALP under software development services segm ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
