TMI Blog2018 (12) TMI 1742X X X X Extracts X X X X X X X X Extracts X X X X ..... of its total revenue. In the case of Applied Materials (I) P. Ltd. v. ACIT, IT(TP) [ 2016 (9) TMI 1458 - ITAT BANGALORE] , this Tribunal excluded Acropetal Technologies Ltd. from the list of comparable companies vide para 16.1 to 16.4 of the said order. We are, therefore, of the view that there is no merit in ground No.5 raised by the revenue in this regard. L T Infotech Ltd. was also excluded by the DRP for the reason that 48.84% of its total expenses are incurred in foreign currency which includes substantial expenses on sub-contracting indicating that the company has high onsite revenue. Besides the above, the revenues from all the 3 segments in which this company was engaged, was considered by the TPO. This part of the directions of the DRP has not been challenged by the revenue in its appeal and therefore no useful purpose will be served by testing the comparability of this company by applying the onsite revenue filter. R S Software (I) P. Ltd - This company was not sought to be excluded by the assessee in its appeal before the DRP and accepted the action of the TPO in accepting this company as comparable company. The DRP suo motu applied onsite revenue filter to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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 ₹ 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 study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000) 158,401,000 126,894,000 24.83 6. Infosys Ltd. 253,850,000,000 177,030,000,000 43.39 7. Larsen Toubro Infotech Ltd. 23,318,122,096 19,764,861,289 19.83 8. Mindtree Ltd. (seg) 8,783,000,000 7,937,143,242 10.66 9. Persistent Systems Solutions Ltd. 189,490,457 155,172,089 22.12 10. Persistent Systems Ltd. 6,101,270,000 4,971,860,000 22.84 11. R S Software (India) Ltd. 1,882,638,471 1,617,804,170 16.37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems India Pvt. Ltd. from the list of comparable companies chosen by the TPO. The relevant ground of appeal raised by the Assessee in this regard is Gr.No.3(l). At the time of hearing, the learned counsel submitted that the Assessee s grievance would be addressed if the aforesaid three grounds are adjudicated and therefore the other grounds of appeal raised by the Assessee need not be adjudicated. 9. As far as the Revenue is concerned, it is aggrieved by exclusion of some of the companies chosen by the TPO and has raised the following grounds of appeal in this regard:- Software development services segment 3. The DRP erred in directing the AO/TPO to exclude M/s. Acropetal Technologies Ltd., M/s. Larsen Toubro Infotech Ltd. and M/s. Software (India) Ltd., from the list of comparables, holding them to be functionally dissimilar as they are having significant onsite revenues, thereby seeking exact comparability while searching for comparable companies of the assessee under TNMM method, whereas requirement of law and international jurisprudence require seeking similar comparable companies. Also, the nature of activity, ie., software development remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables holding it to be functionally uncomparable, without appreciating that the primary source of income of the comparable is from provision of software development services. Also, the DRP erred in imposing a condition beyond law in seeking exact comparability, whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin. 10. The DRP erred in disregarding the position of law that there could be differences between the enterprises compared under TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises. 11. The DRP erred in directing the AO to exclude M/s. Tata Elxsi Ltd., from the list of comparables, holding it to be functionally uncomparable, without appreciating the fact that the comparable qualified all the qualitative and quantitative filters applied by the TPO and it is a similar comparable company and moreover, the requirement of law and international jurisprudence require seeking similar comparable companies while searching for comparable companies under TNMM. The DRP has also not appreciated that there have been no projects in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cademic for the reason that Acropetal Technologies Ltd. was excluded by the DRP on the ground that segmental details of its employee cost was not available. This company was also excluded for the reason that there was absence of segmental information to examine whether it passes export sales filter and for the reason that software revenue was not more than 75% of its total revenue. 12. In the case of Applied Materials (I) P. Ltd. v. ACIT, IT(TP)A No.17 39/Bang/2016 for the AY 2011-12, order dated 21.09.2016, this Tribunal excluded Acropetal Technologies Ltd. from the list of comparable companies vide para 16.1 to 16.4 of the said order. We are, therefore, of the view that there is no merit in ground No.5 raised by the revenue in this regard. Similarly, L T Infotech Ltd. was also excluded by the DRP for the reason that 48.84% of its total expenses are incurred in foreign currency which includes substantial expenses on sub-contracting indicating that the company has high onsite revenue. Besides the above, the revenues from all the 3 segments in which this company was engaged, was considered by the TPO. This part of the directions of the DRP has not been challenged by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration with similar directions as was given by the Tribunal in the case of Applied Materials (I) P.Ltd.(supra). Thus, ground No. 3(l) raised by the assessee is treated as partly allowed. 15. In ground No.6, the revenue has challenged the action of the DRP in excluding E-Infochip Ltd. from the list of comparable companies. This company was excluded for the reason that no segmental information regarding its diverse functions was available and it fails the software services income filter. Besides the above, there were major fluctuation in its profit which were influenced by extraordinary and peculiar circumstances and therefore this company was regarded as not comparable. In the case of Commscope Networks (I) P. Ltd. v. ITO, IT(TP)A No.166 181/Bang/2016, order dated 22.02.2017, the Tribunal excluded this company from the list of comparable companies for the identical reasons as are given by the DRP in the present case. We therefore do not find any merit in ground No.6 raised by the revenue. 16. As far as ground No.7 raised by the revenue is concerned, the same relates to exclusion of ICRA Techno Analytics Ltd. from the list of comparable companies. It is not in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded by the DRP from that chosen by the TPO has been pointed out and therefore ground No.10 of the revenue has to be regarded as general in nature calling for no adjudication. 20. As far as ground No.11 is concerned, the revenue is aggrieved by the exclusion of Tata Elxsi Ltd. from the list of comparable companies by the DRP. The DRP excluded tis company from the list of comparables for the reason that it is not functionally comparable. In the case of Applied Materials (I) P. Ltd. (supra), comparability of this company was considered by this Tribunal and vide para 20 of its order, the Tribunal came to the conclusion that this company was engaged in diversified activities of product design services, innovation design, engineering services, virtual computing labs, etc. In view of the aforesaid decision of the Tribunal excluding this company from the list of comparable companies, we find no merit in ground No.11 raised by the revenue. 21. The grounds that are left for consideration in the assessee s appeal in the software development services segment is ground No.3(j) in which the assessee has aggrieved by non-inclusion of some companies in the list of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess of 25% of the total sales and hence the company passes the filter. (c) The TPO for the assessment year 2009-10 in assessee s own case has included the company in the final list of comparables. 25. The assessee has also placed reliance on the order dated 29.09.2016 passed by the TPO in assessee s own case for the AY 200910. In the aforesaid case for AY 2009-10, the ITAT remanded the issue to the TPO for fresh consideration regarding inclusion of this company after verification of employee cost. In the order giving effect to the order of Tribunal, the TPO has found that the employee cost was more than 25% of the revenue of this company and therefore this company was to be regarded as a comparable company. In our view, it would be just and appropriate to set aside the order of DRP and remand for consideration afresh by the TPO, the employee cost in this year and thereafter decide the comparability of this company in accordance with the law. 26. In ground No. 3(k), the assessee has prayed for exclusion of all 3 companies which were retained by the DRP in the impugned order. In this regard, the ld. counsel for the assessee has brought to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cyber Media Research Ltd. 10.59 3. ICC International Agencies Ltd. 24.66 AVERAGE MEAN 18.25 Computation of arm s length price by the TPO and the adjustment made (in Rs.) Arm s Length Mean Margin 18.25% Operating Cost 40,90,56,356 Arm s Length Price 118.25% of Operating Cost 48,37,09,141 Price received 44,89,08,504 Shortfall being adjustment u/s. 92CA 3,48,00,637 29. On appeal by the assessee, the DRP excluded ICC International Agencies Ltd. from the list of comparable companies on the ground that information regarding nature of services available in public domain was not sufficient to come to conclusion whether servicing income is also earned by the assessee from sales marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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