TMI Blog2020 (5) TMI 380X X X X Extracts X X X X X X X X Extracts X X X X ..... Guidance can be taken from definition of the Associated Enterprise from Section 92A(2)(e) where in it is prescribed that one enterprise holding 26% shares in the other enterprise can be considered as an associate enterprise. Similarly in the provisions of Section 40A(2)( b) the persons having substantial interest is described as a person carrying not less than 20% of voting power in that company. 20 % or 26% interest is considered as substantial interest. As the provisions of Section 92A(2 )( a) are from the transfer pricing chapter itself, a limit of 25 % is applied as the threshold limit for the related party transactions. If the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. We order that the decision of the ld. CIT (A) on the issue of RPT cannot be upheld. Accordingly, we direct the exclusion of concerns Accel Transmatic Ltd., Geometric Ltd., R.Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices company and Wipro Ltd. has invested in R D activities for development of IP, hence not meeting the criteria of FAR. - ITA No. 1077/Bang./2012, ITA No. 1272/Bang./2012 - - - Dated:- 30-4-2020 - Ms. Sushma Chowla, Vice President And Dr. B. R. R. Kumar, Accountant Member For the Assessee : Sh. Ravi Sharma, Adv. For the Revenue : Ms. Nidhi Sharma, Sr. DR ORDER PER DR. B.R.R. KUMAR, ACCOUNTANT MEMBER: The present appeals have been filed by the assessee and revenue against the order of the ld. CIT ( A)- IV, Bangalore dated 05.07 .2012 . 2. Following grounds have been raised by the revenue: 1. The order of the Commissioner of Income Tax (Appeals)-I, Bangalore is opposed to law and facts of the case. 2. The Commissioner of Income Tax (Appeals) erred in stating that what is excluded from export turnover needs to be excluded from total turnover. 3. The Commissioner of Income Tax (Appeals) erred in relying on the decision in the case of Tata Elxsi Limited in the circumstance when the High Court decision is not accepted by Department and SLP is filed. 4. In the facts and circumstances of the case, the ld. CIT (A) erred in holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information technology enabled services by ₹ 71 ,09,586 . [corresponding to ground 2 of original grounds of appeal] 3. The learned CIT-(Appeals) has erred in upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis performed by the learned TPO in the TP Order; [corresponding to ground 3 (a) of original grounds of appeal] 4. That the learned CIT( A) has erred in upholding the learned TPO s action of carrying out his own comparability analysis and modifying some of the filters applied by the Appellant (i.e. related party transaction [ RPT ] filter 0% applied by the learned CIT(A)), without providing an opportunity of being heard; [corresponding to ground 3( b) of original grounds of appeal] 5. That the learned CIT(A) erred in applying RPT 0 % filter in excluding companies, whereas RPT 15 % filter should have been applied and accordingly should have excluded Accel Transmatic Ltd., Geometric Ltd., R Systems International Ltd and Ishir Infotech Ltd in the software development segment of the Appellant and Apollo Health Street Limited, Caliber Point Business Solutions Ltd., HCL Comnet System ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company is functionally dissimilar, as it has significant revenue from software products and no segmentation is available; [corresponding to ground 3( c) of original grounds of appeal] 11. That the learned AO/TPO erred in not appreciating that Lucid Software Ltd is functionally not comparable to the software development segment of the Appellant, as it is a software product company which has incurred substantial product development expenditure; [corresponding to ground 3(c) of original grounds of appeal] 12. That the learned CIT (A) erred in excluding Mediasoft Solutions Ltd. on account of functional dissimilarity and low margin, whereas this company is functionally comparable to the software development segment of the Appellant; [corresponding to ground 6 (additional grounds)] 13. That, without prejudice, the learned CIT ( A) while excluding Persistent Systems Ltd. on the ground of RPT 0 %, has failed to appreciate that this company should have been excluded on the basis of it being functionally dissimilar to the software development services of the Appellant, as it is engaged in provision of software services and software product development with no segmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of original grounds of appeal] 19. That, without prejudice, the learned CIT( A) while excluding Eclerx Services Ltd on the ground of RPT 0 %, has failed to appreciate that this company is functionally dissimilar to the IT enabled segment of the Appellant, as it is engaged in providing specialized services like Data Analytics, Operations Management and Audits Reconciliation services which are in the nature of nature of Knowledge Process Outsourcing ( KPO ) service and cannot be compared to a support services company like Appellant; [corresponding to ground 3 (c) of original grounds of appeal] 20. That, without prejudice, the learned CIT( A) while excluding HCL Comnet Systems and Services Ltd. (seg) on the ground of RPT 0 %, has failed to appreciate that this company is functionally dissimilar to the IT enabled segment of the Appellant, as it provides connectivity services, security services and IT infrastructure management services, has intangibles, has RPT 15 % of sales and has a different accounting year; [corresponding to ground 3 (c) of original grounds of appeal] 21. That, without prejudice, the learned CIT( A) while excluding Informed Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken as a comparable due to a serious indictment on the Management/ Board of the company, making its financial information unreliable; [corresponding to ground 7 (additional grounds)] 27. That the learned CIT ( A) erred in upholding the action of the learned TPO in including Vishal Information Technologies Ltd. as a functionally comparable company to the IT enabled services segment of the Appellant, whereas this company is functionally dissimilar as it has a different business model wherein it provides agency services by outsourcing services to third party vendors and acting as an intermediary between the final customer and the vendor and thereby having low employee cost of 2 .3 % of its revenue; [corresponding to ground 7 (additional grounds)] 28. That, without prejudice, the learned CIT ( A) while excluding Wipro Ltd. only on the ground of RPT 0 %, has failed to appreciate that this company is functionally dissimilar to the IT enabled services segment of the Appellant, as it is engaged in providing activities of various fields like technology innovation, process innovation delivery innovation, has brand value and is engaged in significant Research and development activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction to the tune of more than 25 % with related parties were excluded. The TPO held that it is an appropriate filter to eliminate the influence of the control transactions. The ld. CIT (A) held that even a one comparable without related party transaction is arrived on the comparability analysis, there is no rationale to retain the comparables which have related party transactions. The ld. CIT (A) is of the opinion that only if it is not possible to find out any comparable without the related party transaction, the TPO has to apply a suitable filter to identify such comparables, margins on which are not influenced by the related party transaction to make a purposive interpretation uncontrolled transaction. In the instant case, the ld. CIT ( A) held that there is no need to include any comparable which has a related party transaction as there are a number of comparables available for the study which do not have any related party transactions. Holding this, he excluded Accel Transmatic Ltd., Geometric Ltd., R Systems International Ltd and Ishir Infotech Ltd in the software development segment and Apollo Health Street Limited, Caliber Point Business Solutions Ltd., HCL Comnet S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Section 92A(2 )( a) are from the transfer pricing chapter itself, a limit of 25 % is applied as the threshold limit for the related party transactions. If the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. Hence, keeping in view the entirety of the facts, we order that the decision of the ld. CIT (A) on the issue of RPT cannot be upheld. Accordingly, we direct the exclusion of concerns Accel Transmatic Ltd., Geometric Ltd., R.Systems International Ltd. and Ishir Infotech Ltd. in the software development segment of the appellant and Apollo Health Street Limited, Caliber Point Business Solutions Ltd., HCL Comnet Systems and Services Ltd. and Informed Technologies Ltd. in the ITES segment. 11. The comparable Avani Cimcon Technologies Ltd., e-Zest Solutions Ltd., Flextronics Software Systems Ltd., Ishir Infotech Ltd., Mediasoft Solutions Ltd., Thirdwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly, with the case of Lucid Software Ltd. which is predominantly product Development Company, hence the same cannot be taken as a comparable. Similarly Tata Elxsi Ltd. is a product company and the same cannot be taken as a comparable. 13. Regarding the Persistent Systems Ltd., the same is to be excluded owing to extra ordinary event with regard to restructuring during the relevant year wherein the subsidiary Control Net (India) Ltd. was merged with the comparable company. 14. The assessee pleaded for inclusion of the concern Media Soft Solutions Ltd. The TPO had excluded the same because of the low margins. The case of the assessee is that the same merits to be included. However, we find no merit in the same. 15. Now coming to the ITES segment wherein the assessee has chosen 15 comparables to benchmark its transaction. The TPO had finally selected 27 concerns as comparables. The CIT(A) excluded 18 concerns and the assessee before us is contesting the inclusion of 14 concerns. Accentia Technologies Ltd. is found to be functionally not comparable and also owing to the amalgamation of two companies namely, Iridium Technologies Ltd. and Geo Soft Technologies Ltd. Similarly, Bo ..... 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