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TMI Blog2018 (12) TMI 1742X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;AE' for short). It is not in dispute that the transaction of rendering of software development services and providing Marketing support services by the Assessee to its AE were international transactions and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transactions has to be determined having regard to Arm's Length Price (ALP). The issues to be decided in the cross appeals are determination of ALP of the international transaction of providing software development services and Marketing Support Services by the Assessee to its AE. 3. We will first deal with dispute with regard to determination of ALP in Software Development Service Segment. During the previous year 201011 relevant to the AY 2011-12, the Assessee rendered software development (technical support) to its AEs. As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of Rs. 9,01,16,965/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction the Assessee filed a Transfer Pricing st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3,941,962,000 3,175,616,000 24.13 13. Tata Elxsi Ltd. (seg) 3,581,985,000 2,962,533,352 20.91 AVERAGE MARGIN 24.82 6. The TPO computed the addition to be made to the total income on account of determination of ALP at Rs. 1,10,42,685/- as follows:- Arm's Length Mean Margin on cost 24.82% Less: Working Capital Adjustment (As per Annex.C) 1.63% Adjusted margin 23.19% Operating Cost 82,116,771 Arms Length Price (ALP) @ 123.19% of Operating Cost 101,159,650.20 Price Received 90,116,965 Shortfall being adjustment u/s. 92CA 11,042,685 7. The addition suggested by the TPO was added to the total income of the Assessee by the AO in the draft order of assessment. Aggrieved by the order of the AO making the aforesaid addition, the Assessee preferred objections before Disputes Resolution Panel (DRP). The DRP vide its directions dated 19.11.2015 excluded 10 comparable companies finally chosen by the TPO and retained only 3 comparable companies. 8. The Assessee is aggrieved by not including two comparable companies which it had chosen in its Transfer Pricing Analysis (TP Analysis) viz., C.G.Vak Software & Exports Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audited financials. 6. The DRP erred in directing to exclude E-infochips Ltd., from the list of comparables holding that no segmental information is available and that it fails 75% service revenue filter, by not acknowledging the fact that entire revenue of the company comes from provision of services, and service income being 100% of its sales, the company qualifies the filter. 7. The DRP erred in directing exclusion of M/s. M/s.ICRA Techno Analytics Ltd., from the list of comparables on the ground that it is into diversified activity and no segmental data is available, without appreciating that the basic function of the company is developing software solutions in those and other verticals. The company's business of analysis of statistical data of its clients before providing software solutions does not render the services to be functionally uncomparable. 8. The DRP erred in directing to exclude M/s. E-Zest Solutions Ltd., from the list of comparables holding it to be functionally uncomparable, thereby seeking exact comparability by imposing condition beyond law whereas requirement of law is to acknowledge only those differences that are likely to materially affect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its appeal. These grounds revolve around the application of onsite revenue filter. In the business of rendering software development services, development of software is done offshore i.e. in India for an Associated Enterprise (AE) outside India. These are called offshore development services. In some cases, software developer, say an Indian company renders software development services at the site of AE outside the country. Such services are called onsite development services. The onsite revenue filter applied in TP cases is a filter whereby a company whose revenues from onsite services are beyond a particular limit of the total revenues from rendering software development services are to be regarded as not comparable for the reason that the geographic area and the market in which software development services are rendered onsite are different. The plea of the revenue is that functionally both offshore companies and onsite companies perform software development services and therefore should be considered as comparable. On this aspect, we find that in the TP cases, the onsite revenue filter is generally applied for the purpose of choosing comparable companies. It is, however, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue stands decided accordingly. 14. As far as ground No. 3 (l) raised by the assessee is concerned, the assessee has sought inclusion of a company by name Evoke Technologies P. Ltd. As far as this company is concerned, the assessee accepted this as a comparable before the TPO and did not challenge inclusion of this company in the grounds before the DRP. But the DRP, however, excluded this company for the reason that while the profit margin of comparable companies was 20.91% to 24.83%, profit margin of this company was abnormally low at 8.11%. The DRP further went on to examine that the abnormal low profit of this company was due to some extraordinary circumstances that prevailed during the previous year which adversely affected the profit margin of this company. The DRP, therefore, was of the view that this company will not be a comparable company. On this aspect, we find that there is no dispute that this company is functionally comparable with that of the assessee. Moreover, in the case of Applied Materials (I) P. Ltd. (supra) this Tribunal considered the comparability of this company and vide para 21 to 21.2 restored for fresh consideration the comparability of this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP excluded this company from the list of comparable companies for the reason that it is functionally not comparable with a pure software development services provider such as the assessee as it was engaged in diverse activities. In the case of Commscope Networks (I) P. Ltd. (supra), this Tribunal considered the comparability of this company and vide para 9 of its order, upheld the exclusion of this company, for identical reasons as is given by the DRP as in the present case. We therefore find no merit in ground No.8 raised by the revenue and the same is dismissed. 18. Ground No.9 by the revenue is challenging exclusion of Infosys Technologies Ltd. from the list of comparable companies. The DRP excluded this company from the list of comparable companies on the ground that it is functionally not comparable due to several reasons. In the case of Applied Materials (I) P. Ltd. (supra), this Tribunal considered the comparability of this company with software development service provider such as the assessee. In para 18 of its order, the Tribunal observed that Infosys Technologies Ltd. was a giant in the filed of Information Technology and had a brand value and huge turnover and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... major expenditure for a service provider is employee cost. * The expenses recorded under the head 'purchases and personnel cost' are employee related expenditure. * Mere difference between the foreign currency inflow and export sales cannot form basis for existence of peculiar economic circumstance. * The TPO for the AY 2007-08 in assessee's own case has included the company in the final list of comparables. 23. The ld. counsel for the assessee also brought to our notice the decision of the Tribunal in the case of Applied Materials (I) P. Ltd. (supra) wherein this Tribunal under identical circumstances vide para 13.1 to 13.4 set aside the issue to the AO for fresh consideration with a direction to the TPO to seek necessary information regarding employee cost u/s. 133(6) of the Act. Following the aforesaid decision, we remand to the TPO the question of inclusion of this company as a comparable company on the same lines as directed by the Tribunal in the case of Applied Materials (I) P. Ltd. (supra). 24. As far as CG Vak Software & Export Ltd. is concerned, this company was excluded for the reason that details regarding employee cost was not available and therefore it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot available. Our attention was drawn to the decision of the Bangalore Bench of the Tri in the case of Applied Materials (I) P. Ltd. (supra) wherein in para 9.3.1 to 9.3.3 this Tribunal came to the conclusion that comparability of this company has to be decided afresh by the TPO after considering the facts as recorded in the decisions rendered by the Tribunal in the case of Electronics for Imaging India P. Ltd. (2017) 85 taxmann.com 124 (Bang.Trib.). We are of the view that similar directions would be appropriate in the present assessment year also. Thus, ground No.3(k) is decided accordingly. 28. We shall now take up for consideration the dispute with regard to determination of ALP in the Marketing Support Segment. Ground No.2 raised by the revenue in its appeal is with regard to determination of ALP in the sales and marketing support segment. As far as this ground is concerned, the TPO had chosen 3 comparable companies and determined the addition to be made towards shortfall of ALP as follows:- Comparables selected by the TPO and their arithmetic mean Sl. No. Name of the Company Mark-up on Total Costs (in %) 1. Asian Business Exhibition & Conferences Ltd. 19.51 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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