TMI Blog2020 (10) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... selected from final list of comparable. Also companies showing RPT% in excess of 15% need to be excluded. - IT(TP)A No.80/Bang/2014, IT(TP)A No.87/Bang/2014 - - - Dated:- 18-9-2020 - Shri B. R. Baskaran, Accountant Member And Smt. Beena Pillai, Judicial Member For the Appellant : Shri K.R. Vasudevan, A.R. For the Respondent : Shri Priyadarshi Mishra, D.R. ORDER PER B.R. BASKARAN, ACCOUNTANT MEMBER: These cross appeals are directed against the order dated 20.12.2013 passed by Ld. CIT(A)-IV, Bengaluru and they relate to the assessment year 2005-06. 2. The assessee is a captive software development service provider to its associated enterprise named M/s. GXS Inc. The matter relating to determination of arm s length price in respect of international transaction was referred by the A.O. to the transfer pricing officer who made transfer pricing adjustment of ₹ 3,09,56,816/-. The assessing officer added the same to the total income returned by the assessee. The assessee had claimed deduction u/s 10A of the Act. However the assessing officer rejected the same by holding that the undertaking of the assessee has been formed by splitting up or reconst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion as to whether the undertaking has been established for the first time or whether it is an expansion of a unit or shifting of a unit or splitting or reconstruction of a unit and examined the applicability of section 10A(2)(iii) and held that the assessee does not fulfill the conditions of sec.10A(2)(1)(b), 10A(2)(ii) and 10A(2)(iii) and therefore the assessee is not eligible for deduction u/s 10A of the Act. He, however, considered the assessee s alternative claim of deduction u/s 80HHE of the Act. Aggrieved, the assessee preferred an appeal before the CIT(A) who allowed the same holding that the undertaking has existed in the same shape and form and has carried on the same business both before and after change in ownership and the mere fact of change of ownership cannot be taken to mean that the undertaking itself has been formed from the splitting up or re-construction of an existing business. Aggrieved, the revenue is in appeal before us. 4. The learned departmental representative strongly supported the order of the AO while the learned counsel for assessee supported the order of the CIT(A) and also placed reliance upon the decision of the B Bench of this Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has raised many grounds, at the time of hearing the Ld. A.R. submitted that the assessee is pressing for exclusion of 7 companies out of the comparable companies confirmed by the Ld. CIT(A). Accordingly, the rest of the grounds urged by the assessee are dismissed as not pressed. 7. The facts relating to the transfer pricing adjustment are discussed in brief. The assessee is established as a 100% export oriented unit registered under Software Technology Park of India scheme in Bangalore. The assessee is primarily engaged in providing design and development of software services to its parent company. During the year under consideration, the turnover of the assessee in respect of international transaction with A.E. amounted to ₹ 24.09 crores. In order to determine the Arms length price of international transactions, the assessee selected TNM method as most appropriate method. The assessee adopted Operating profit by Total cost (OP/TC) as Profit level indicator (PLI). The PLI of the assessee worked out to 10.47%. 8. The TPO rejected the transfer pricing study of the assessee and proceeded to select his own comparables. The TPO selected 17 companies as comparable c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing adjustment of ₹ 3,09,56,816/-. 10. Before Ld. CIT(A), the assessee contended that the turnover of the assessee falls in the range of Rs,1 crore to ₹ 200 crores. Accordingly, by placing reliance on the decision rendered by Bangalore Bench of ITAT in the case of Genisys Integrating Systems Vs. DCIT (15 ITR (Trib) 476) and other decisions, the assessee contended that the comparable companies having turnover of more than ₹ 200 crores should not be considered as comparables. The Ld. CIT(A) accepted the said contentions of the assessee and accordingly excluded following 5 companies: Sl.No. Company Name Turnover (in crores) 1 Igate (seg) 406 2 Flextronics (seg) 457.45 3 L T Infotech 562.45 4 Satyam 3464.2 5 Infosys 6859.7 Accordingly, 12 companies selected by the TPO came to be confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In coming to the above conclusion the CIT(A) has followed the decision of the Mumbai ITAT in the case of Telecordia Technologies (P.) Ltd. v. Asstt. CIT [IT Appeal No.7821 (Mum.) of 2011 vide paragraph 139 of his order at page-44. The learned DR relied on the order of the TPO/AO. We find that the Bangalore ITAT in its decision in the case of Net Devices India Ltd. v. ITO [2015] 63 taxmann.com 94 (Bang. - Trib.) 2005-06 vide paras 18.4.1-18.4.3 at pages 3740 has taken the view that this company was not comparable with a SWD service provider such as the Assessee on the ground that this company was a product company and owning substantial IP rights etc. Following the precedents on this issue rendered on identical facts and circumstances of the present case, we dismiss Gr.No.8 9 raised by the Revenue. (B) EXENSYS SOFTWARE SOLUTIONS LTD :- 18. As far as Ground No.3 raised by the Revenue in its appeal is concerned, the Revenue is challenging the CIT(A)'s action in excluding Exensys Software Solutions Ltd. ('Exensys' for short) and Thirdware Solutions Ltd. ('Thirdware' for short) on the basis of their abnormal profit margins in FY 2004-05. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity. According to the Assessee, this company focuses on the development of niche products for the transport and aviation industry and that no proper segmental details are available in relation to the said diverse activities. The Assessee has placed reliance on the decision of ITAT Bangalore in the case of Net Devices India (P.) Ltd. (supra) at paras 18.1.1-18.1.3 at pages 33 to 35] wherein it was held that this company is functionally dissimilar to a company providing SWD services in similar circumstances. In view of the precedent on the issue rendered on identical facts and circumstances of the case for the same AY 2005-06, we are of the view that the CIT(A) ought to have excluded this company from the list of comparable companies . (D) GEOMETRIC SOFTWARE SOLUTIONS CO LTD FOUR SOFT LTD 29. The learned counsel for the Assessee made submission regarding the computation of RPT as adopted by the TPO. The submission in this regard on behalf of the Assessee was that these two companies, namely, Geometric Software Solutions Co. Ltd . (`Geometric') and Four Soft Ltd. ('Foursoft') ought to stand rejected since their RPTs are at 19.89% and 22.52% respectivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) was justified in excluding this company from the list of comparable companies on the ground that its profits were abnormally high owing to extraordinary event of merger/amalgamation that took place during the relevant previous year. Since no such extraordinary events took place, in the case of Thirdware Solutions Ltd., we held that this company ought not to have been excluded on the ground of abnormal profits owing to extraordinary events happening in the relevant previous year. The Assessee now seeks to support exclusion of this company on the ground of functional comparability. There is no discussion in the order of CIT(A) on the functional comparability of this company. It is the plea of the Assessee that Thirdware Solutions Ltd., is engaged in multiple diverse activities in FY 2004-05 including (a) software development services under which the company provides application development, customer relationship management and ERP; and (b) sale of software product and related services, without proper segmental data being available for the said diverse activities and for such reasons Bangalore ITAT in Net Devices India Pvt. Ltd. (supra) at paras 8.1-8.3 and 9.1-9.3 at page ..... 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