TMI Blog2017 (8) TMI 1683X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 (10) TMI 591 - ITAT, CHANDIGARH] no comparable can be excluded on the ground that the company is earning abnormal profits or incurring abnormal losses. Accordingly, ground are allowed. We uphold the action of the TPO/AO to include in the list of comparables the comparables Bodhtree Consulting Ltd. and Geometric Software Solutions. Exclusion of companies as functionally dissimilar with that of assessee. - IT(TP)A No. 880/Bang/2013 and Cross Objn. No. 59/Bang/2016 in IT(TP)A No. 880/Bang/2013 - - - Dated:- 9-8-2017 - Sunil Kumar Yadav, Member (J) and Inturi Rama Rao, Member (A) For the Appellant: Neera Malhotra, CIT(DR) For the Respondent: P.K. Prasad and Umashankar Gautam, Advocates ORDER Inturi Rama Rao, Member (A) 1. The appeal by the revenue and the cross objection by the assessee are directed against the order of the Commissioner of Income-tax (Appeals)-IV, [CIT(A)-IV], Bengaluru, dated 06/03/2013 for the assessment year 2005-06. 2. Briefly facts of the case are that the respondent-assessee is a company duly incorporated under the Companies Act, 1956. It is wholly owned subsidiary of Oracle Netherlands. It is engaged in the business of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the period under consideration were excluded; Companies having different financial year ending (i.e., not March 31, 2005) or data is not available for 12 months, were rejected; Companies whose employee cost to operating revenues is less than 25% were excluded; and Companies whose onsite revenue is more than 75% of the export revenue were excluded. Applying the above filters, the TPO rejected 7 comparables out of 8 comparables selected by the assessee-company in the TP study and introduced 16 new companies finally selected the following comparables: 6. The TPO computed average profit margin of the comparables finally selected at 26.59% and after giving working capital adjustment the adjusted arithmetical mean PLI was determined at 27.69%. On the above said basis, the TPO computed the transfer pricing adjustment as follows: 7. The AO passed assessment order dated 26/11/2008 u/s. 143(3) after making TP adjustment u/s. 92CA and also restricting deduction u/s. 10A of the Act. 8. Being aggrieved by the above assessment order, an appeal was filed before the CIT(A) who, vide impugned order, held that applying turnover filter of Rs. 1 to Rs. 200 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that profit on cost of M/s. Exensys Software Solutions Ltd. and M/s. Thirdware Solutions Ltd. respectively is abnormal and directing to exclude these companies from the list of comparables. 5. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that M/s. Bodhtree Consulting Ltd., and M/s. Geometric Software Solutions Ltd., being functionally different, cannot be taken as comparables. 6. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that M/s. Amex Information Technologies Ltd, being functionally similar, can be taken as comparable. 7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 8. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 10. The assessee has filed cross objections as under: 1. That the order passed by the learned Commissioner of Income Tax (Appeals) - IV, Bangalore ('CIT (Appeals)'), to the extent prejudicial to the Respondent, is ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to these quantitative filers, such companies are also functionally dissimilar and hence cannot be considered as comparables. Subsequently, the assessee filed revised cross objections as under: 1. That the order passed by the learned Commissioner of Income Tax (Appeals) - IV, Bangalore ('CIT (A)'), to the extent prejudicial to the Respondent, is bad in law and liable to be quashed, [corresponding to cross objection 1] 2. That on the facts and circumstances of the case, the learned CIT(A) erred in upholding the approach of the learned Joint Director of Income-tax (Transfer Pricing Officer - II), Bangalore ('learned Transfer Pricing Officer' or learned TPO') in rejecting the Transfer Pricing (TP') documentation maintained by the Respondent on invoking provisions of sub-section 3 of 92C of the Income-tax Act, 1962 ('the Act') contending that the information or data used in the computation of the arm's length price is not reliable or correct, [corresponding to cross objection 2] 3. That the learned CIT(A) has erred in upholding the learned TPO's approach using data as at the time of assessment proceedings, instead of that available a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct development services, owns intangible assets. Even otherwise, there is an extraordinary event of amalgamation contributing to high profits; [corresponding to cross objection 5] 10. That, without prejudice, the learned CIT(A) while excluding Thirdware Solution Ltd. on the ground of abnormal margins, has failed to appreciate that the company should also have been excluded on the ground that this company is functionally dissimilar as it is engaged in software services, sale of user licenses and sale of investments, having no segmental information; [corresponding to cross objection 5] 11. That, without prejudice, the learned CIT(A) while excluding Flextronics software Systems Ltd. On the ground of turnover, has failed to appreciate that the company should also have been excluded on the grounds that this company is functionally dissimilar as it has a Hybrid Revenue Model of supplying both products and services, having no segmental information for products and services and is engaged R D activities; [corresponding to cross objection 5] 12. That, without prejudice the learned CIT(A) while excluding Satyam Computer Services Ltd. on the ground of turnover, has failed to ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormal profits or incurring abnormal losses. Accordingly, ground Nos. 3 and 4 are allowed. 14. Ground No. 5 challenges direction of the CIT(A) to delete the comparables, M/s. Bodhtree Consulting Ltd., and M/s. Geomertric Software Solutions on functional differences. The issue of comparability of these companies had come up for discussion in the case of M/s.NTT DATA Global Delivery Services Ltd. in IT(TP)A No. 1487/Bang/2013 dated 06/04/2016 wherein it was held as follows: Bodhtree Consulting Ltd. 9.1 The learned AR of the assessee-company submitted that the comparables chosen by the TPO viz., Bodhtree Consulting, Exensys Software Solutions, Flextronics Software Systems, Geometric Software Solutions, Sankhya Infotech, Tata Elxsi and Thirdware Solutions are not comparable on account of functional differences. He relied on the order of the co-ordinate bench of Tribunal in IT(TP)A No. 532/Bang/2013 dated 30/07/2015 in the case of DCIT vs. Kodiak Networks India Pvt. Ltd., wherein the Tribunal held that on account of wide fluctuations in the margin, Bodhtree Consulting cannot be treated as comparable. The relevant paragraphs are as under: 34. As can be seen from the above ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available. It was further submitted that this company had related party transaction. 9.4 We find that the above submissions are not supported by the annual financial results of the company enclosed in the paper book placed at pages 895 to 920. From the Director's report at page 906 of the paper book, it is clearly stated that the company has only one segment i.e. software development. In the notes to the accounts, at page 920 of the paper book, it is clearly mentioned that except managerial remuneration paid to managing director, there were no other related transactions. Therefore, the submissions of the assessee-company on this score cannot be accepted as devoid of any substance. 9.5 In the result, we uphold the action of TPO in including this company in the list of comparables. Geometric Software Solutions: 12. This Company was selected by the assessee-company and accepted by the TPO as it satisfied all the filters applied by him. During the course of hearing, the learned AR of the assessee-company objected to the inclusion of this company on the ground of functional dissimilarities in this connection he relied on the decision of the co-ordinate bench in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the CIT(A) it is clear that there was no discussion by the CIT(A) about functional dissimilarities of these entities. Hence, cross objections itself are not maintainable. 18. In respect of Spanko Telesystems Solutions Ltd., the assessee seeks inclusion of this company on the ground that though the company's business consists of three segments, segmental details were available and should have been considered. Even in respect of this company, there was no discussion by the CIT(A) on this aspect. Hence, the cross objections are not maintainable. 19. Even on merits, the said entities cannot be excluded from the list of comparables as held by the co-ordinate bench of this Tribunal in the case of M/s. NTT DATA Global Delivery Services Ltd., in IT(TP)A) 1487/Bang/2013 dated 06/04/2016 wherein it has been held as follows: 10. As regards Exensys Software Solutions Ltd., this comparable was selected by the TPO. The assessee-company objected to the inclusion of this company in the list of comparables on the ground that it is engaged in the software products and had related party transactions. This contention was rebutted by the TPO by drawing attention to the annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial results of the company wherein it is clearly stated that the related party transactions are less than 25% and the segmental details are made available. It is further noticed that the revenue from the services constitutes more than 85%. Therefore, it can be treated as a software development services company as it passes through revenue filters adopted by TPO. During the course of hearing before us, the ld.AR of the assessee-company had relied on the order of the co-ordinate bench of Tribunal in the case of ITO vs. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No. 1302/Bang/2011 dated 11/6/2015 and DCIT vs. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No. 29/Bang/2012 dated 20/03/2015. On the other hand, learned DR relied on the order of the TPO. We heard the rival submissions and perused the material on record. The co-ordinate bench in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra) deleted this company as comparable, vide par. 26 of the order, on the ground that this company was engaged in the product sales also and therefore, it is functionally dissimilar. But from the order of the TPO as well as the financial results of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered as comparable in the light of the decisions of the co-ordinate bench in the case (i) the Sunquest Information Systems (India) Pvt. Ltd.(cited supra); (ii) Textron Global Technology Centre Pvt. Ltd(cited supra) and (iii) Colt Technology Services India Pvt.Ltd. (cited supra). 15.2 We heard the rival submissions and perused the material on record. The co-ordinate bench (Delhi) of Tribunal in the case Colt Technology Services India Pvt.Ltd. (cited supra) recorded the finding on the above company as follows: Thirdware Solutions Ltd, it was submitted that the said company has a diversified functional professional profile and is also engaged in sale of software licenses. They invest in R D and also provides/sells software licenses and there are no segmental results available in its audited financials to segregate profitability from provision of software development services and from sale of software licences. These information were supported by the annual report for Financial year 2004-05 of the said company. In its annual report a generic disclosure was made that the company is involved in trading of software and provision of IT services. Schedule 14 of the Financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables. 15.3 The decision in the case of Sunquest Information Systems (India) Pvt. Ltd.(cited supra) is based on the non-availability of information to make suitable adjustments to bring the company on par with the assessee-company. However, in the present case, the TPO made available full details of the revenue and expenditure in respect of each of the segments and segmental details are very much available. However this company does not pass through the filter of 75% of revenue. Therefore, this company cannot be considered as software development service provider. Hence, we direct the TPO/AO to delete this company from the list of comparables. ..............23. The revenue is challenging direction of the CIT(A) to exclude the following companies from the list of comparables on the ground that the turnover of the above companies is more than Rs. 200 crores relying on the decision in the case of Genesis Integrating Systems (In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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