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TMI Blog2020 (12) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... le companies of the assessee under TNMM method, whereas requirement of law and international jurisprudence require seeking similar comparable companies. Also, the nature of activity, i.e. software development remains the same, irrespective of the company engaged in providing onsite offshore services. 3. The DRP erred in directing the AO to exclude M/s. Larsen & Toubro info Tech Ltd. and MIs. Acropetal Technologies Ltd,. on the ground that they have significant onsite revenue, without appreciating the fact that onsite developments of software entails more cost and thereby results in power profit margins. 4. The DRP erred in directing the AO to exclude M/s. Acropetal Technologies Ltd., from the list of final comparable also for the reason that clear segmental information of the employee cost was not available. Without appreciating that proper segmental information was available on prowess database as well audited finials. 5. The DRP erred in directing to exclude E-infochips Ltd, from the list of comparables holding these no segmental information is available and that it fails 75% services revenue filter by not acknowledging the fact that entire revenue of the company comes prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar comparable companies while searching for comparable companies under TNMM. The DRY has also not appreciated that there have been no projects in visual computing labs during the relevant previous year. Corporate issue:- 11. The DRP erred in directing the AO to follow the ratio laid down by the Honble court in the case of Tata Elxsi Limited 349 ITR 98 and exclude travel and conveyance expenses as well as expenditure on repairs and maintenance, from the total turnover also, while computing the deduction u/s. 10 A of the I.T. Act, Without appreciating the fact that there is no provision in section 10 A that a such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section I OA provides that that Such expenses are to be reduced only from the export turnover." CO No. 7/B/2017 (by assessee) 1. The directions dated December 28, 2015 passed by the Honorable Dispute Resolution Panel ("DRP") in so far as it relates to the following ground are opposed to law and facts of the case. 2. The Honorable DRP and the learned Assessing Officer ("AO") have erred in upholding the action of the Transfer Pricing Officer ("TPO") in rejecting the Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argin of comparable at 10.22%, thereby holding the transaction to be at arms length. Name of company Margin Akshay Software Technologies Ltd. M/s.CG-VAK Software & Exports Ltd Evoke Technologies Pvt.Ltd Helios & Matheson Information Technology Ltd. LGS Global Ltd M/s.LGS Global Ltd. M/s.Melstar Information Tecnology Ltd. RS Systems International Ltd RS software (I) Ltd M/s.Sasken Cmmunication Technology Ltd Mean 12% 6. Ld. TPO though agreed with most appropriate method, however, was of the opinion that, TP study filed by assessee was unreliable. Ld. TPO thereafter applied certain filters and selected following 13 comparables. Sl. No Company name Net margin as per TP order 1 Acropetal Technologies Ltd. 31.98% 2 E Zest Solutions 21.03% 3 E-Infochips Ltd 56.44% 4 Evoke 8.11% 5 ICRA Techno Analytics Ltd. 24.83% 6 Infosys Ltd 43.39% 7 Larsen & Toubro Infotech Ltd 19.83% 8 Mindtree Ltd.(Seg.) 10.66% 9 Persistent Systems & Solutions Ltd. 22.12% 10 Persistent Systems Ltd. 22.84% 11 R S Software (India)Ltd. 16.37% 12 Sasken Communica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal before us. Assessee filed cross objection against the appeal filed by revenue. In revenue's appeal, grounds raised pertain to application of "on-site revenue filter" and selectively rejecting certain comparables. It has also been alleged that DRP excluded E-Infochips Ltd., on the ground of having service income less than 75% of sales, which is alleged to be contrary to observations of Ld. TPO. It is also alleged that certain comparables have been excluded functional incomparability. Revenue alleged exclusion of following comparables: * M/s. Acropetal Technologies Ltd. * M/s. L&T Infotech Ltd. * E-Infochips Ltd. * ICRA Techno Analytics Ltd. * E zhest Solutions Ltd. * Infosys Technologies Ltd. * M/s. TATA Elxi Ltd. 15. Other issues alleged by revenue is in respect of corporate tax issue challenging exclusion of communication expenses for export turnover and total turnover for purposes of computing deduction under section 10A and accepting assessee claim of not considering loss from non-eligible unit while computing deduction u/s. 10 of the Act. 16. In cross appeal filed by assessee it is observed that assessee challenges exclusion of 3 comparables in Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been submitted that assessee is compensated on a cost plus basis and is therefore insulated from the risk of under utilisation of capacity. It is also submitted that Foreign exchange fluctuation on risk is also vests with AE. Characterisation 26. Based on the above, it can be concluded that assessee is bearing substantially less than normal risks, as it performs limited functions with guidance provided by AE. We first take up appeal filed by revenue in ITA No. 482Bang/2016 Ground No. 2-4: 27. Ld. CIT. DR submitted that, DRP applied applying "on-site revenue filter" selectively respect of following comparables: * Acropetal Technologies Ltd * L&T Infotech Ltd., 28. He submitted that, DRP suo-moto applied on-site revenue filter selectively. It was argued that application of a filter determines, kind of comparables displayed on database, where search is carried. Application of filter to shortlist companies under particular segment is the second step in transfer pricing analysis. It was argued that, once comparables are shortlisted by Ld. TPO, DRP suo moto cannot apply any filter to exclude any particular comparables. Ld. CIT. DR submitted that, DRP applied "on-site revenue fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * HP decision 34. We note that under similar circumstances this Tribunal in case of DCIT vs. CGI Information Systems (supra) observed as under: "19. Acropetal Technologies Limited-As far as exclusion of this company as a comparable company is concerned, it is seen from the Directions of the DRP at paragraph 2.7 at page-9, that this company was excluded on the grounds that: (i) the segmental information containing the break-up of its export sales and employee costs, was not available and it was not possible to ascertain if it passed the export earnings and/or employee costs filters; and (ii) a substantial portion of its software development activities have been outsourced on subcontract and it could, therefore, not be retained as a comparable. The DRP in directing exclusion of this company followed decision of Hyderabad Bench of ITAT in the case of Capital IQ Information Systems (India) (P.) Ltd. v. Dy. CIT (International Taxation) [2013] 32 taxmann.com 21/57 SOT 14 (URO) (Hyd.-Trib.). The DRP also observed that this company was predominantly doing on-site development of software and therefore cannot be compared with a company which develops software off-shore. One of the filters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be beyond the tolerance level and without a finding that on-site revenue is more than 25% of the total revenue, this company ought not to have been excluded from the list of comparable companies. We agree with the submission of the learned DR that for application of on-site revenue filter, the DRP ought to have given a finding regarding the quantum of revenue from on-site software development. Nevertheless, this company goes out of comparability on the ground that the profit margins adopted by the TPO was from 3 divisions of the Assessee. We also find, as submitted by the learned counsel for the Assessee this company was held to be functionally not comparable as it is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles and intellectual property rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, the Assessee submits that the company is a product company having significant intangibles and is thus not comparable to captive software service providers such as the Assessee. In this regard the learned counsel for the Assessee has placed reliance on the decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation regarding diverse functions performed by this company and that there was major fluctuation in its profits, which influenced turnover of this company. We also note that this Tribunal in case of DCIT vs. CGI Information Systems (supra) had encountered with an identical situation for year under consideration. This tribunal observed as under: "24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal is weak and any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the act and rules. As far as ground No. 5 in revenue's appeal is concerned, the revenue seeks to challenge the exclusion of AE Infotech Ltd. On the ground that it failed direct software service income filter at 75%. At the outset, the assessee submits that E Infotech Ltd. was excluded by the DRP on the ground that: (i) no segmental information is regarding its diverse functions is available; (ii) it failed the software service income filter and 75%; (iii) there were major fluctuations in profit and turnover every years which seems to be influenced by extraordinary/peculiar circumstances; and (iv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. reported in (2017) 83 taxmann.com 357 for assessment year 2011-12, being the Transferee Company as under: "9. Now we decide about the remaining six comparables excluded by the DRP and other four comparables retained by the DRP for which the assessee is seeking exclusion. We find that out of these six comparables excluded by the DRP, one comparable i.e. ICRA Techno Analytics Ltd. is having RPT in excess of 15% and therefore, for this reason alone this company has to be excluded although, the DRP has excluded it for a different reason that it is having various activities and the segmental data are not available. We hold this exclusion on account of RPT filter. In fact, we find that para-8 & 9 of the Tribunal order rendered in the case Commscope Networks (India) (P.) Ltd. (Supra) is relevant in respect of inclusion/exclusion of nine companies directed to be excluded by DRP and also in respect of exclusion of four companies which were retained by DRP but it was the contention of the assessee for exclusion thereof. We therefore, re-produce para-8 & 9 of the Tribunal order for the sake of ready reference; "8. We decide the issue of various exclusions and inclusions in these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Software (India) Ltd. Now, we decide about LGS Global Ltd. As per the tribunal order rendered in the case of Applied materials India Pvt. Ltd. v. ACIT (Supra), this is a good comparable and therefore, we direct the A.O. and TPO to include this comparable. So, there should be 4 comparables in the final list of comparable and on the basis of that, the AO/TPO should work out the ALP". 10. As per the above two paras, reproduced from the order of the Tribunal rendered in the case Commscope Networks (India) (P.) Ltd. (Supra), we find that in that case, the Tribunal held that out of 9 comparables excluded by DRP, 3 have to come back being 1) Evoke Technologies Pvt. Ltd., 2) Mindtree Ltd. (Seg) and 3) R.S. Software (India) Ltd. Out of remaining 10 comparable companies selected by TPO, the tribunal in that case excluded. 9 companies being 1) ICRA Techno Analytics Ltd., 2) Acropetal Technologies Ltd. (Seg), 3) e-Zest Solutions Ltd., 4) Infosys Ltd., 5) Larsen & Toubro Infotech Ltd., 6) Persistent Systems & Solutions Ltd., 7) Persistent Systems Ltd., 8) Sasken Communication Technologies Ltd, and 9) Tata Elxsi Ltd. Hence, in that case, only four companies were left in the final list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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