w w w . L a w y e r S e r v i c e s . i n



DE Shaw India Software (P.) Ltd. v/s Assistant Commissioner of Income-tax, Circle -1(2), Hyderabad


Company & Directors' Information:- R S SOFTWARE (INDIA) LTD. [Active] CIN = L72200WB1987PLC043375

Company & Directors' Information:- D. E. SHAW INDIA PRIVATE LIMITED [Active] CIN = U72200TG1996PTC025388

Company & Directors' Information:- C K SOFTWARE PRIVATE LIMITED [Active] CIN = U72501DL2000PTC106184

Company & Directors' Information:- K K SOFTWARE PRIVATE LIMITED [Active] CIN = U72900DL2009PTC193030

Company & Directors' Information:- A. S. INDIA LIMITED [Active] CIN = U70100MP2009PLC022300

Company & Directors' Information:- A K C SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2004PTC128462

Company & Directors' Information:- M C SHAW PVT LTD. [Active] CIN = U51228WB1989PTC046980

Company & Directors' Information:- THE INDIA COMPANY PRIVATE LIMITED [Active] CIN = U74999TN1919PTC000911

Company & Directors' Information:- P AND P SOFTWARE PRIVATE LIMITED [Active] CIN = U74899DL1994PTC057212

Company & Directors' Information:- SOFTWARE INDIA PRIVATE LIMITED [Active] CIN = U72200GJ1995PTC025791

Company & Directors' Information:- N. D. SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200TG1998PTC029778

Company & Directors' Information:- T AND H SOFTWARE PRIVATE LIMITED [Active] CIN = U72200UP2000PTC025638

Company & Directors' Information:- M S SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2005PTC133997

Company & Directors' Information:- G A S SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2004PTC127546

Company & Directors' Information:- B B SOFTWARE LTD [Strike Off] CIN = L30009WB1995PLC072361

Company & Directors' Information:- INDIA CORPORATION PRIVATE LIMITED [Active] CIN = U65990MH1941PTC003461

Company & Directors' Information:- H K SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200WB2001PTC093967

Company & Directors' Information:- J SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200TZ2000PTC009229

Company & Directors' Information:- K S M SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2004PTC128463

Company & Directors' Information:- R B SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2005PTC140322

Company & Directors' Information:- SOFTWARE INDIA PRIVATE LIMITED [Active] CIN = U72200RJ1995PTC010577

Company & Directors' Information:- R J SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2005PTC133815

Company & Directors' Information:- H J SOFTWARE PRIVATE LIMITED [Active] CIN = U72200TG2007PTC056351

Company & Directors' Information:- I & I SOFTWARE INDIA PRIVATE LIMITED [Strike Off] CIN = U72200TN2005PTC056262

Company & Directors' Information:- D F SOFTWARE INDIA PRIVATE LIMITED [Strike Off] CIN = U72200TZ2003PTC010629

Company & Directors' Information:- E. C. SOFTWARE INDIA PRIVATE LIMITED [Active] CIN = U72900TN2007PTC063486

Company & Directors' Information:- Q 3 INDIA SOFTWARE PRIVATE LIMITED [Active] CIN = U72900TN2007PTC065786

Company & Directors' Information:- K Y SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200DL2005PTC136072

Company & Directors' Information:- T M I SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200KA2005PTC036299

Company & Directors' Information:- B C L SOFTWARE (INDIA) PRIVATE LIMITED [Strike Off] CIN = U30007MH1999PTC117922

Company & Directors' Information:- C C M SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200TG2000PTC034002

Company & Directors' Information:- M I S SOFTWARE PRIVATE LIMITED [Active] CIN = U72200TN2008PTC068694

Company & Directors' Information:- A. T. SOFTWARE PRIVATE LIMITED [Active] CIN = U72200TG1996PTC023841

Company & Directors' Information:- W C SHAW PVT LTD [Active] CIN = U51909WB1942PTC010901

Company & Directors' Information:- J A K SOFTWARE PVT LTD [Active] CIN = U72200DL2001PTC111929

Company & Directors' Information:- R R SOFTWARE PVT LTD [Under Process of Striking Off] CIN = U72200KL1991PTC006051

Company & Directors' Information:- A M H SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200DL2005PTC132410

Company & Directors' Information:- P D A SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72900DL2003PTC123465

Company & Directors' Information:- K C SOFTWARE PRIVATE LIMITED [Active] CIN = U74899DL1989PTC036923

Company & Directors' Information:- I SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72300MH2012PTC225903

Company & Directors' Information:- V M SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72900PN2010PTC136847

Company & Directors' Information:- M L SHAW PVT LTD [Active] CIN = U51909WB1934PTC008071

Company & Directors' Information:- H M SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200HP2011PTC031756

Company & Directors' Information:- S N R SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72900DL2012PTC243073

Company & Directors' Information:- K A V SOFTWARE PRIVATE LIMITED [Active] CIN = U72200DL2005PTC144121

Company & Directors' Information:- C M S SOFTWARE PRIVATE LIMITED [Active] CIN = U74899DL2005PTC142352

Company & Directors' Information:- S M I T SOFTWARE COMPANY PRIVATE LIMITED [Strike Off] CIN = U74899DL2006PTC144816

Company & Directors' Information:- A D SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200KA2002PTC030722

Company & Directors' Information:- H. A. N. R. E. J SOFTWARE PRIVATE LIMITED [Strike Off] CIN = U72200TG2008PTC062044

Company & Directors' Information:- G & H SHAW PVT LTD [Strike Off] CIN = U27310WB1962PTC025389

Company & Directors' Information:- SHAW & CO. PVT LTD. [Strike Off] CIN = U51909WB1953PTC021086

Company & Directors' Information:- R SHAW AND CO. LTD. [Dissolved] CIN = U99999MH1922PTC001006

    IT Appeal No. 1302 of 2010

    Decided On, 21 January 2015

    At, Income Tax Appellate Tribunal Hyderabad

    By, THE HONOURABLE MR. B. RAMAKOTAIAH
    By, ACCOUNTANT MEMBER & THE HONOURABLE MR. SAKTIJIT DEY
    By, JUDICIAL MEMBER

    For the Appellant: Vikram Vijayaraghavan, Advocate. For the Respondent: Ramakrishna Bandi, Advocate.



Judgment Text

Income Tax Appellate Tribunal, Hyderabad Bench ‘A’

Saktijit Dey, Judicial Member

1. This appeal by the assessee is directed against the order dated 28/07/2010 passed by CIT(A)-III, Hyderabad pertaining to AY 2005-06.

2. Briefly stated, the facts are, the assessee is a wholly owned subsidiary of D.E. Shaw and Co., LLP(Desco) (hereinafter referred to as Associated Enterprise, in short AE) a limited liability partnership established and existing under the laws of the State of Delaware, USA having its principal office at New York. The AE is engaged in global financial services in the investment advisory activities, broker dealer activities and computer based quantitative management. The assessee provides software development services to its AE. Therefore, the assessee is purely a captive service provider. The assessee has been recognised as 100% EOU registered under the Software Technology Park of India (STPI) Scheme. As per the terms of the contract with its AE, the assessee is remunerated at cost plus 12% for the services rendered by it to its AE. For the impugned assessment year, the assessee earned revenue of Rs. 18,59,36,488 from international transaction of providing software development services to its AE. The assessee for the impugned assessment year filed its return of income on 29-10-2005 declaring total income of Rs. 25,94,371/-. Along with return of income, the assessee also submitted a TP study report wherein transaction Net Margin Method (TNMM) was adopted as most appropriate method and operating profit/operating cost as the profit level indicator (PLI). The assessee in the TP study, after conducting a search in the data bases on the basis of functions, assets and risk (FAR) analysis, selected 18 companies as comparables with an average profit margin of 16.97% on cost. Though, assessee's operating margin was shown at 8.19%, but, the price charged to the AE was considered to be within arm's length.

3. During scrutiny assessment proceedings, the Assessing Officer noticing that the assessee had entered into international transactions with its AE made a reference to the Transfer Pricing Officer (TPO in short) for determining the arm's length price. In course of the proceedings before the TPO, the assessee in response to the query made by the TPO also brought some more companies as comparables. The TPO however did not accept the TP study done by the assessee broadly on the ground that the assessee has used multiple year data of comparable companies, it has used certain non comparable companies as comparables, filters have been selectively used. The TPO, though was of the view that TNMM is the most appropriate method and operating profit/operating cost is the PLI but he nevertheless rejected TP study done by the assessee. After rejecting the TP study submitted by the assessee the TPO himself undertook a search process in the databases by considering only the current year data. In this process, the TPO selected 17 comparables (including some of assessee's comparables) with average margin of 26.59% which are as under:

1. Bodhtree consulting Ltd.

2. Lanco Global Systems Ltd.

3. Exensys Software Solutions Ltd.

4. Sankhya Infotech Ltd.

5. Sasken Network Systems Ltd.

6. Four Soft Ltd.

7. Thirdware Solution Ltd.

8. RS Software (India) Ltd.

9. Geometric Software Solutions co. Ltd.

10. Tata Elxsi Ltd. (Seg)

11. Visual Soft Technologies Ltd. (seg)

12. Sasken Communication Technologies Ltd. (Seg)

13. Igate (seg.)

14. Flextronics (seg)

15. L& T Infotech

16. Satyam

17. Infosys

4. After allowing working capital adjustment of 0.96%, the adjusted arithmetic PLI was computed at 25.63% resulting in determination of ALP at Rs. 21,59,03,831/- as against the price charged by the assessee at Rs.18,59,36,488/-. Thus, the shortfall of Rs. 2,99,67,243 was treated as the adjustment u/s 92CA of the Act. While determining the ALP as above, the TPO also rejected the assessee's claim towards risk adjustment.

5. As a consequence of the order passed by the TPO, the Assessing Officer passed the assessment order by adding the adjustment of Rs. 21,59,03,831/-. The Assessing Officer also re-computed the deduction claimed u/s 10A of the Act by reducing the communication charges from the export turnover. Against the assessment order so passed, assessee preferred appeal before ld. CIT(A). Ld. CIT(A) rejected all the contentions of the assessee excepting in case of one of the comparable company i.e. Satyam Computer Services Ltd., which ld. CIT(A) excluded from the list of comparables. As a result, adjusted mean PLI was worked out to 25.45% and ALP was determined at 21,55,94,489. Thus, adjustment u/s 92CA was scaled down to Rs. 2,96,57,901.. Being aggrieved of the aforesaid order of ld. CIT(A), the assessee has preferred this appeal raising various grounds both on transfer pricing issues as well as corporate tax issues. At the outset, ld. AR expressed his intention of not pressing the ground on corporate tax issues i.e. Ground No. 3 & 3.1 with sub-grounds on account of relief being granted by the learned CIT(A). Hence, these grounds are dismissed. Even, on TP issues also learned AR confined his argument only to the issues of selection of certain comparables and disallowance of risk adjustment. In view of the aforesaid, we shall confine our finding to these two issues only. At first, we will deal with issue of selection of comparables.

6. The learned AR specifically objected to 8 companies selected by the TPO as comparables and retained by learned CIT(A). which are as under:-

(1) Bodhtree Consulting Ltd.

(2) Exensys Software Solutions Ltd.

(3) Sankhya Infotech Ltd.

(4) Foursoft Ltd.

(5) Thirdware Solutions Ltd.

(6) Tata Elxsi Ltd.

(7) Infosys Technologies Ltd

(8) Flexitronics Ltd.

7. The submissions of the learned AR against selection of these comparables, in brief, are as under:

1. Bodhtree Consulting Ltd.

(i) The learned counsel submitted that this company should be rejected on the basis of filters applied by TPO himself, which are as under:

* Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover.

* Functionally different filter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services.

(ii) He submitted, following rulings have analysed and rejected this company as it has software products:

1. Intergraph Consulting (P.) Ltd. [ITA No. 923/Hyd/2010]

2. Invensys Development Centre (India) (P.) Ltd. v. Addl. CIT [2014] 151 ITD 245/43 taxmann.com 419 (Hyd.)

3. Ness Innovative Business Services (P.) Ltd. v. Dy. CIT [2014] 151 ITD 190/47 taxmann.com 377 (Hyd.)

2. Exensys Software Solutions Ltd.

(i) The learned counsel submitted that this company should be rejected for the following reasons:

(a) Functionally different: The company is a software product and ITES company. The company owns significant brand intangibles (almost 60% of its net block of assets), unlike the appellant, which is a contract captive services provider. Further, various disclosures on the site of the company also indicate that it is into product development.

(b) Exceptional year of Operations: There was amalgamation of the company with Holool India Ltd. with retrospective effect from April 01, 2004, which had a material/significant impact on the results of the company for financial year ended March 31, 2005 and confirmed by the company in its response to 133(6) notice.

(c) Error in margin computation: The ld TPO has excluded the deferred revenue expenditure while computing the net margin of the company. If the same is included, the net margin of the company would be 32.68%.

(ii) It was submitted that the following rulings have analysed and rejected this company as it has software products and held as not comparable to a service provider:

- Intoto Software India (P.) Ltd. v. Asstt. CIT [2013] 35 taxmann.com 421/[2014] 146 ITD 360 (Hyd.)

- Invensys Development Centre (India) (P.) Ltd. (supra)

- Intergraph Consulting (P.) Ltd. (supra)

- Ness Innovative Business Services (P.) Ltd. (supra)

3. Sankhya Infotech Ltd.

(i) The learned counsel submitted that this company is functionally different as evident from the following:

* - Various disclosures in the annual report and response to 133(6) notice indicates clearly that the company is into software products (services are supplementary to products licensing)

* - The TPO has in subsequent year rejected this company as comparable relying on the same 133(6) response.

(ii) The following rulings have analysed and rejected this company as it has software products :

- Invensys Development Centre India (P.) Ltd. (supra)

- Intergraph Consulting (P.) Ltd. (supra)

- Ness Innovative Business Services (P.) Ltd. (supra)

4. Foursoft Ltd.

(i) The learned counsel submitted that this company is functionally different as evident from various disclosures in the annual report (Directors report, Management discussion and website information) indicating clearly that the company is into software products. The following rulings have analysed and rejected this company as it has derived income from software license and AMC's:

- Intoto Software India (P.) Ltd. (supra)

- Dy. CIT v. Hellosoft India (P.) Ltd. [2013] 32 taxmann.com 101/57 SOT 4 (Hyd.)

- Invensys Development Centre (India) (P.) Ltd. (supra)

- Intergraph Consulting (P.) Ltd. (supra)

- Ness Innovative Business Services (P.) Ltd. (supra)

- Intoto Software India (P.) Ltd. (supra)

5. Thirdware Solutions Ltd.:

(i) Ld. Counsel submitted that this company is functionally different for the following reasons:

* As per reply to notice issued u/s 133(6), the company informed that it is engaged in implementation and customer services which include training, customized development and help desk services for ERP software and distribution of products of Quad Inc. and Hyperion Solutions Corporation.

* Various news articles available on the internet http://www.hinduonnet.com/2001/07/11/stories/0611000h.htm stated that the company is a distributor of products;

* As per the company's website www.thirdware.net/ourcapabilities.htm. has stated the company has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Pre-sales, sales, training, consulting, implementation and support to application management services.

* He submitted, the following rulings have analysed and rejected this company as it is into trading of software licenses:

- Intoto Software India (P.) Ltd. (supra)

- Invensys Development Centre (India) (P.) Ltd. (supra)

- Intergraph Consulting (P.) Ltd. (supra)

- Ness Innovative Business Services (P.) Ltd. (supra)

6. Tata Elxsi Ltd.

(i) The learned counsel submitted that this company shall be rejected as comparable since it is a specialized embedded software development company and this company has in fact clearly stated in its response to 133(6) notice that due to the complex segments in which they are operating, it is not comparable to any other software services company.

(ii) He submitted, the following rulings have analysed this company and relying on the same 133(6) response, rejected it as a comparable to software services provider:

- Intergraph Consulting (P.) Ltd. (supra)

- Ness Innovative Business Services (P.) Ltd. (supra)

- Invensys Development Centre India (P.) Ltd. (supra)

7. Infosys Technologies Ltd.

(i) The learned counsel submitted that this company is engaged in diversified activities including products, consultancy & solutions and this company commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads.

(ii) Further, he submitted that the issue of comparability of Infosys to a small captive service provider is no longer res-integra. The following cases have specifically anlaysed in detail the comparability of Infosys on various parameters to a similar size software service provider and rejected it:

- Intoto Software India (P.) Ltd. (supra)

- Patni Telecom Solutions Pvt. Ltd. v. ACIT [IT Appeal No. 1846/Hyd/2012]

- Hellosoft India (P.) Ltd. (supra)

- Invensys Development Centre (India) (P.) Ltd. (supra)

- Intergraph Consulting (P.) Ltd. (supra)

- Ness Innovative Business Services (P.) Ltd. (supra)

8. Flexitronics Ltd.

(i) Objecting to this company, the learned AR submitted that the said company is not only functionally different but it cannot be treated as a comparable because it is into development of product. It was submitted that the company has also reported very high margin of profit. The learned AR submitted that the TPO himself having classified the assessee as purely software development service provider, he could not have treated Flextronics Software Systems Limited (seg) as a comparable as it is into product development. In support of such contention, the learned AR relied upon the following rulings:

- Intoto Software India (P.) Ltd. (supra)

- Hellosoft India (P.) Ltd. (supra)

8. The learned DR, though, agreed that issue of selection of comparables are covered by the decisions of ITAT referred to by learned AR, but, he nevertheless supported the reasoning of TPO and learned CIT(A).

9. Having considered the submissions of the parties and examined the record, we find merit in the submissions of learned AR with regard to non-comparability of various comparable companies selected by the TPO. On a perusal of the facts on record as well as order of TPO it is clear that assessee is purely a software development service provider, that too to its AE only. Thus, assessee is a captive/contract service provider. As can be seen, comparability of aforesaid comparables were considered in cases of various other purely software development service providers like assessee for the same assessment year. Coordinate benches of this Tribunal in the above referred cases after examining different aspects have held these companies as uncomparable to a purely software development service provider. The finding of the coordinate bench in case of Ness Innovative Business (P.) Ltd. (supra), with regard to some of the comparables for the same assessment year is extracted hereunder for ready reference:

'9.1 For the sake of record, the decision in the case of Ness Innovative Business Services P. Ltd., vs. DCIT, Circle 16(1), Hyderabad vide ITA.No.472, 553 & 1775/Hyd/2011 dated 18.06.2014 on the above 7 comparables are extracted as under:

"1. Bodhtree Consulting Ltd.

The learned counsel submitted that this company should be rejected under the following TPO's filters:

* Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover.

* Functionally different filter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services.

2. Exensys Software Solutions Ltd.,

The learned counsel submitted that this company should be rejected under the following TPO's filters:

(d) Functionally different: The company is a software product and ITES company. The company owns significant brand intangibles (almost 60% of its net block of assets), unlike the appellant, which is a contract captive services provider. Further, various disclosures on the site of the company also indicate that it is into product development.

(e) Exceptional year of Operations: There was amalgamation of the company with Holool India Ltd. with retrospective effect from April 01, 2004, which had a material/significant impact on the results of the company for financial year ended March 31, 2005 and confirmed by the company in its response to 133(6) notice.

(f) Error in margin computation: The ld TPO has excluded the deferred revenue expenditure while computing the net margin of the company. If the same is included, the net margin of the company would be 32.68%.

It was submitted that the following rulings have analysed and rejected this company as it has software products and held as not comparable to a service provider:

- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)

- ITO v. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011)

- Integrated Decisions & Systems India (P) Ltd. v. DCIT (ITA No. 27/JP/2011)

- ACIT v. Sonata Software (ITA No. 3514/Mum/2010)

- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014

3. Sankhya Infotech Ltd.

The learned counsel submitted that this company is functionally different as evident from the following:

* Various disclosures in the annual report and response to 133(6) notice indicates clearly that the company is into software products (services are supplementary to products licensing)

* The TP office has in subsequent year rejected this company as comparable relying on the same 133(6) response.

The following rulings have analysed and rejected this company as it has software products :

- ITO v. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011)

- Integrated Decisions & Systems India (P) Ltd. v. DCIT (ITA No. 27/JP/2011)

- ACIT v. Sonata Software (ITA No. 3514/Mum/2010)

- DCIT v. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09)

- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014

4. Foursoft Ltd.

The learned counsel submitted that this company is functionally different as evident from various disclosures in the annual report (Directors report, Management discussion and website information) indicates clearly that the company is into software products. The following rulings have analysed and rejected this company as it has derived income from software license and AMC's:

- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)

- DCIT v. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09)

- Invensys Development Centre India (P.) Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014

5. Thirdware Solutions Ltd.:

Ld. Counsel submitted that this company is functionally different for the following reasons:

* As per reply to notice issued u/s 133(6), the company informed that it is engaged in implementation and customer services which include training, customized development and help desk services for ERP software and distribution of products of Quad Inc. and Hyperion Solutions Corporation.

* Various news articles available on the internet http://www.hinduonnet.com/2001/07/11/stories/0611 000h.htmstated that the company is a distributor of products;

* As per the company's website www.thirdware.net/ourcapabilities.htm. has stated the company has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Pre-sales, sales, training, consulting, implementation and support to application management services.

* The following rulings have analysed and rejected this company as it is into trading of software licenses:

- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)

- ITO v. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011)

- ACIT v. Sonata Software (ITA No. 3514/Mum/2010)

- E-Gain Communications (P) Ltd. v. ITO [2008] 23 SOT 385 (Pune).

6. Tata Elxsi Ltd.

The learned counsel submitted that this company shall be rejected as comparable since it is a specialized embedded software development company and this company has in fact clearly stated in its response to 133(6) notice that due to the complex segments in which they are operating, it is not comparable to any other software services company.

The following rulings have analysed this company and relying on the same 133(6) response, rejected it as a comparable to software services provider:

- Conexant Systems India Pvt. Ltd. (ITA No. 1429/Hyd/2010 and 1978/Hyd/2011)

- Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011)

- Logica Pvt. Ltd. (IT(TP)A No. 1129/Bang/2011)

- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014

7. Infosys Technologies Ltd.

The learned counsel submitted that this company is engaged in diversified activities including products, consultancy & solutions and this company commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads.

Further, he submitted that the issue of comparability of Infosys to a small captive service provider is no longer res-integra. The following cases have specifically anlaysed in detail the comparability of Infosys on various parameters to a similar size software service provider and rejected it:

- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)

- Virtusa India Pvt. Ltd. v. DCIT (ITA No. 1962/H/2010)

- Patni Telecom Solutions Pvt. Ltd. v. ACIT (ITA No. 1846/Hyd/2012)

- Adaptec (India) Pvt. Ltd. v. DCIT (ITA No. 1801/Hyd/2009)

- DCIT v. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09)

- Trilogy E Business Services Software Ltd. v. DCIT (ITA No. 1054/Bang/2011 - Para 20)

- Telcordia Technologies India P Ltd. (ITA No. 7821/Mum/2011 - Para 7.4)

- Cordys Software India Pvt. Ltd. v. ACIT (ITA No. 1972/H/2011)

- Agnity India Technologies v. ITO (ITA No. 3856/Del/2010)

- Agnity India Technologies Pvt. Ltd. v. ITO (High Court decision - ITA 1204/2011)

- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014

6. We have considered the issue and examined the record including paper books placed on record. There is a merit in assessee's contentions about non-comparability of various comparable companies selected by the TPO.

7. As regards the Exensys Software Solutions Ltd., as seen from the paper book placed on record, there is a merger of Holool India Ltd. and in the director's report (PB-951), there is a clear mention that the company's income of Rs. 737.79 lakhs is possible with the amalgamation of Holool India Ltd. It was further mentioned that Assessee company has got benefit by advanced latest technical expertise on various technology domains of the transferor company. Further, that company has charged deferred expenditure and the amount claimed in this year is Rs. 1.22 crores as against Rs. 30.21 lakhs in earlier year. This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies. Vide page 957 of paper book, it was seen that out of gross assets of Rs. 7.95 crores, Brands alone consist of Rs. 5 crores, therefore, intangible assets comprising of substantial part of this company's assets. Not only in the correspondence with the TPO that Assessee expressed its inability to furnish separate accounts for two amalgamated companies but also further it has clearly mentioned vide letter dated 26-04-2007 to the TPO that there is a gap in the expenditure expected to incur and actual expenditure incurred which made the company record high operating margin on cost. These factors indeed support assessee's contention that this exceptional profit with the fact of amalgamation affected operating profit of the company and this cannot be taken as comparable. Other issues were also analysed and accepted in various cases as relied upon by the learned counsel. In the case of Intoto Software India Pvt. Ltd., (supra) this comparable case was analysed and held as under:

"17. Having heard both parties and having considered the material available on record, we find that there is no dispute that Assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i.e., Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Higher Forums that to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by Assessee are made for the first time before the Tribunal. The Tribunal being the final fact finding authority is bound to take note of the objections of Assessee. As the material relied upon by the learned Counsel for Assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, we deem it fit and proper to remand this issue to the file of the Assessing Officer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz., Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct the Assessing Officer/TPO to exclude this company from the list of comparables."

8. In view of the above, we are of the opinion that there is an extra-ordinary event which resulted in high operating margin of that company and we, therefore, direct the AO to exclude this company from the list of comparables. In the above referred case of Intoto Software India Pvt. Ltd., complete details were not placed on record, therefore, the matter was sent to AO for verification whereas in this case assessee has objected even before the AO/CIT(A), therefo

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re, there is no need to set aside the issue to the file of the AO for examination as was done in the case of Intoto Software (supra). We are, therefore, of the opinion that on the basis of facts placed on record, the case of Exensys Software Solutions Ltd. cannot be taken as comparable. 9. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suffice to say that assessee's submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm's length margin accordingly.' Similar view has also been expressed in other decisions referred to hereinabove. Therefore, respectfully following the consistent view of the ITAT, we exclude, Bodhtree Consulting Ltd., Exensys Software Solutions Ltd., Sankhya Infotech Ltd., Four Soft Ltd., Thirdware Solutions Ltd., Tata Elxsi Ltd and Infosys Technologies Ltd. from the list of comparables. 10. As far as Flextronics Software Limited is concerned, we find that in case of Intoto Software India (P.) Ltd., (supra) the co-ordinate Bench of this Tribunal having found it to be functionally different as it is into product development has directed excluding it for comparability analysis. Respectfully following the decision of the coordinate bench of this Tribunal in case of Intoto Software India (P.) Ltd. (supra) we also direct the Assessing Officer/TPO to exclude this company. 11. As regards risk adjustment/working capital adjustment, ld. AR submitted before us that TPO himself has computed the adjustment to be made towards risk at 0.85%, however, in the final analysis, he did not allow any such adjustment. He, therefore, submitted that risk adjustment at least to the extent of 0.85% needs to be allowed. 12. Learned Departmental Representative on the other hand supported the order of DRP and TPO. 13. Having considered the submissions of the parties and perused the orders of departmental authorities, we are of the view that since TPO himself has concluded that risk adjustment to the extent of 0.85% can be allowed, we direct him to allow the risk adjustment to that extent. It may be pertinent to mention here that in case of assessee in the subsequent AY i.e. AY 2007-08, considering similar risk profile, the Tribunal has allowed risk adjustment of 1%. Keeping in view the aforesaid facts, we direct Assessing Officer/TPO to allow risk adjustment at 0.85% while computing ALP. In view of the aforesaid, Assessing Officer/TPO is directed to compute ALP afresh in terms with direction given hereinbefore and thereafter treat the shortfall, if any, as the adjustment to be made to ALP. 14. In the result, appeal of the assessee is partly allowed.
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