TMI Blog2021 (6) TMI 1164X X X X Extracts X X X X X X X X Extracts X X X X ..... unds of appeal: Based on the facts and circumstances of the case and in law, Lam Research (India) Private Limited (hereinafter referred to as Appellant'), respectfully craves leave to prefer an appeal against the assessment order passed by the learned Assessing Officer [hereinafter referred to as the learned AO] under section 143(3) read with section 144C of the Income-tax Act, 1961 (the Act') on the following grounds. 1. The impugned order of the learned AO pursuant to the directions of the Hon'ble DRIP, erred in assessing the total income at ₹ 1,44,71,721 as against the returned income of ₹ 29,240; 2. The learned AO I Transfer Pricing Officer (TPO') and the Honble DRP have erred, in making an addition of ₹ 1,31,78,142 to the total income of the Appellant on pretext that price charged was lower than arm's length price determined for provision of software development services transaction rendered by Appellant to its AE(s); 3. The learned AO/TPO and the Hon'ble DRIP have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited g) IGate Global Solutions Limited h) Mindtree Limited 7. The learned AO/TPO and the Hon'ble DRP have erred, in law and in facts, by accepting/rejecting companies based on unreasonable comparability criteria; 7.1 The learned AO/DRPITPO has failed to appreciate the fact that the following companies are not functionally comparable to the software development segment of Appellant, therefore has erred in law and in facts in considering them as comparable companies: a) Accel Transmatic Limited (Seg) b) Avani Cimcon Technologies Limited c) Celestial Labs Limited d) E-Zest Solutions Limited e) Flextronics Software Systems Limited (Seg.) f) Ishir Infotech Limited g) KALS Information Systems Limited (Seg) h) Lucid Software Limited i) Tata Elxsi Limited Se j) Thirdware Solutions Limited k) Wipro Limited (Seg) 7.2 Without prejudice to transfer pricing documentation, the learned AO/DRP/TPO has failed to appreciate the fact that the following companies are not functionally comparable to the software development segment of Appellant, therefore, the learned AO/DRP/TPO has erred in law and in facts by considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Development services ₹ 12,67,55,785 /- Fixed asset loan ₹ 5,87,883/- Interest payable on Loan ₹ 4,67,183/- Reimbursement of expenses (Received) ₹ 8,35,368/- 3. Assessee used TNMM as most appropriate method and OP/OC as the PLI. It computed its margin at 10.51%. Ld. TPO observed that assessee selected 28 comparables with an average margin of 14.53%. As margin was between 5% range the assessee held its transaction to be at arms length. The Ld. TPO rejected the Transfer Pricing analysis carried by assessee as according to Ld. AO it suffered certain defects. Applying various filters Ld. AO rejected the comparables selected by assessee. The Ld. TPO undertook fresh search and selected set of following 26 comparables with average margin of 25.14%: Sl. No. Comparables Margin Margin 1. Allsec Transmatic Ltd (SEG) 18.91% 2. Avani Cincom Technologies Ltd 49.97% 3. Celestial Labs Ltd 53.06% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,44,85,721/-. 5. On receipt of draft assessment order, the Ld. AO also disallowed the tally/Internet charges incurred on delivery of software abroad, travelling expenses made in foreign currency etc from export turnover, thereby reducing the deduction claimed by assessee under section 10A at ₹ 12,64,165/-. 6. Against the draft assessment order, assessee filed objections before DRP. The DRP passed its direction based on which assessment order under section 143(3) read with sec. 144C of the Act, was passed on 19/09/2011, determining the income in the hands of assessee for year under consideration at ₹ 1,57,79,300/-. Aggrieved by the order of the Ld. AO, assessee filed appeal before this Tribunal in ITA (TP) A No. 1087/B/2011 dated 12/07/2017. This Tribunal set aside the entire Transfer Pricing issue to the DRP, for comparing functional similarity/dissimilarity with the comparables selected by the Ld. TPO based on the FAR analysis, and also to pass an order in accordance with law, laid down by the Hon'ble High Court and this Tribunal. 7. Based on the directions of this Tribunal, the DRP gave its direction on 20/12/2018 and consequent to the DRP directions, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k, credit collection risk and service liability risks which are normal in the case of independent entrepreneurs. The risk profile of the taxpayer vis- -vis. other comparables has been dealt with in later part of this order under the head Risk Adjustment . 10.4. The Ld. TPO thus observed that the assessee is a captive service provider compensated at cost +10% and does not bear any risks associated with it services rendered to the associated enterprises. Based on the above we shall undertake the comparability analysis of following comparables with that of assessee: 11. It has been submitted by the Ld. AR that all the comparables alleged by the assessee for inclusion/exclusion has been considered by coordinate bench of this Tribunal in case of M/s. Mphasis Ltd. vs. ACIT in IT(TP)A No. 14/B/2012 by order dated 19/05/2017 for assessment year 2007-08 and M/s. Net App India Pvt. Ltd. vs. DCIT in IT(TP)A No. 593/B/2012 and IT(TP)A No. 687/B/2012 for assessment year 2007-08 by order dated 27/02/2020. 12. We have perused these decisions and observed that they have also been categorised as a captive service provider rendering software development services to its associated ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws on the subject, considered the question, whether companies having turnover more than 200 crores to 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:-- 17.7 We have considered the rival submissions. The substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT v. Pentair Water India Put. Ltd. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 15. In the light of the aforesaid decision of the Tribunal, comparables sought for exclusion in Ground No. 6.1 raised by the assessee is allowed. 13.4. In the light of the above, we uphold exclusion of these comparables raised by assessee in ground No. 6(d). Accordingly this ground raised by assessee stands allowed. Ground No. 7(7.1) 14. In this ground, assessee seeks exclusion of following comparables on functional dissimilarities: Accel transmatic Ltd. (SEG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable for the reason that it is into pure software development activities and is not engaged in R D activities is bad in law. 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No. 6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool CELSUITE to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company should be rejected as a comparable being functionally different. 45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s. 133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 5.3 Ishir Infotech Ltd This comparable was included by Ld. TPO and objected by assessee for its functional dissimilarities. It has been submitted that, infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fact would be clear from the fact that very same 26 companies were chosen as comparables in case of the assessee as well as in case of First Advantage Offshore Services Put. Ltd., (supra). Ld. Counsel submitted that, this company is to be excluded from the list of comparables on the basis of finding of this Tribunal in case of First Advantage Offshore Services Put. Ltd., (supra). He submitted that, facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. The Ld. DR however objected to the exclusion of this company from the list of comparables. On a careful perusal of material on record, we find that this Tribunal in case of First Advantage Offshore Services Pvt. Ltd., A.Y: 2007 - 08 (supra) took note of dissimilarities between assessee therein and Lucid software Ltd.,. As observed therein, this company was involved in development of software as compared to captive software service provider. As the facts of the case before us are similar, respectfully following the decision of the coordinate bench, we hold that these 2 companies are also to be exclude Respectfully following the decision of this Tribunal ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for P.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of IT services. 20. With regard to the inclusion of Hellos Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of Y-4-LS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed our in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. in the instant case also we find that the said concern is liable to be excluded from the list of comparables. 29. Respectfully following the decision of the Tribunal referred to above, we direct the A O/TPO to exclude the aforesaid company from the final list of comparable companies for the purpose of determining ALP. W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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