Income Tax Appellate Tribunal - Hyderabad
Ces Private Limited, Hyderabad vs Assessee on 31 October, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 1445/Hyd/2010
Assessment Year : 2006-07
CES Pvt. Ltd., vs. Dy. Commissioner of Income-
Hyderabad. tax, Circle - 1(2), Hyderabad.
PAN: AABCC8337L
(Appellant) (Respondent)
Assessee by : Shri P. Murali Mohan
Revenue by : Shri P. Soma Sekhar Reddy
Date of hearing : 31-10-2013
Date of pronouncement : 29-11-2013
O RDE R
PER B. RAMAKOTAIAH, A.M.:
This is an appeal by Assessee directed against the orders of AO u/s 143(3) of the Act, read with directions of DRP u/s 144C of the Act dated 25-10-2011. The appeal is with reference to the issues on transfer pricing adjustments made by the AO to the incomes under software segment, ITES segment and capital advance to AEs and also adjustments made to claim u/s 10A.
2. Assessee raised detailed grounds running to 26 in appeal and also filed additional grounds running from 27 to 37. When asked to file concise grounds, the learned counsel submitted that coordinate benches are insisting upon detailed grounds on each issue, accordingly, Assessee raised so many grounds. The sum and substance of these grounds pertains to four issues, on which, Assessee was aggrieved and went on to explain issues. Assessee placed on record various paper books containing submissions before 2 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. DRP in one paper book, submissions before TPO in one paper book, draft assessment order in one paper book, annual reports of companies, which are being objected to in two paper books and list of case law relied upon in one paper book, in all, six volumes mentioning as Annexures, but, with no page numbers. The learned counsel also in the course of arguments placed various orders relied upon separately.
3. We find that additional grounds are in continuation of existing grounds about comparables and various objections raised by Assessee. Therefore, we are of the opinion that neither the grounds nor the additional grounds need to be extracted in this order.
4. We have heard the learned counsel and learned DR in detail.
5. Assessee is a company incorporated in India and provides wide range of business solutions in information technology, primarily, to its AEs, namely CES USA and its group concerns. Assessee company is in two business segments, viz.,information technology services and software development services. Assessee reported the following transactions as per its 3CEB report:
1) Information and ITES 1,92,39,937/-
2) Information technology services 3,30,73,708/-
3) interest received on loan from AE 15,56,833/-
Consequent to the reference to TPO by the AO, the TPO undertook the exercise of analyzing Assessee's international transactions as per the provisions. There is no dispute with reference to the TNMM method as most appropriate method both by Assessee and the Department. The data base searched are the same ie. prowess data base/ capital line. The TPO rejected Assessee's TP documentation as well as allocation of cost and went on to examine various comparables in both the segments differently by using various filters. 5.2 In ITES segment, TPO after elaborate exercise and giving opportunity to Assessee adopted 13 comparables, which include 3 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. some of the comparables selected by Assessee and accepted by it, which are as under:
1. Maple eSolutions Ltd.
2. Alisec Technologies Ltd.
3. Datamatics Financial Services Ltd.
4. Transworks Information Services Ltd.
5. Cosmic Global Ltd.
6. Vishal Information Technologies Ltd.
7. Asit C Mehta Financial Services Ltd.
8. Goldstone Infratech Ltd.
9. Spanco Ltd.
10. Ace Software Exports Ltd.
11. Apex Knowledge Solutions P. Ltd.
12. R Systems International Ltd.
13. Flextronics Software Systems Ltd.
Arithmetic mean of the above companies was arrived at 24% (OP/OC) and as operating revenue declared by Assessee is at 9.58%. The TPO recommended the addition of Rs. 27,32,841/- being shortfall u/s 92C of the Act.
5.3 W ith reference to the software development services in the software development segment, the TPO selected 20 comparables, which are as under:
1. Aztec Software Ltd.
2. Geometric Software Ltd.
3. Infosys Ltd.
4. KALS Info Systems Ltd.
5. Mindtree Consulting Ltd.
6. Persistent Systems Ltd.
7. R Systems International Ltd.
8. Sasken Communications Ltd.
9. Tata Elxsi Ltd.
10. Lucid Software Ltd.
11. Media Soft Solutions Ltd.
12. RS Software India Ltd.
13. SIP Technologies & Exports Ltd.
14. Bodh Tree Consulting Ltd.
15. Accel Transmatics Ltd.4 ITA No. 1445/Hyd/2010 CES Pvt. Ltd.
16. Synsoys Business Solutions Ltd.
17. Flextronics Software Systems Ltd.
18. Lanco Global Systems Ltd.
19. Megasoft Ltd.
20. Gate Global Solutions Ltd.
The OP/OC arrived at 20.68% and applying the operating cost of Rs. 30,04,60,885/- determined the ALP at Rs. 3,69,00,316/- and made adjustment of Rs. 38,26,608/-.
5.4 The third issue is relating to determination of ALP pertaining to interest received on loan advanced by Assessee. Assessee has received Libor plus interest whereas the TP was of the opinion that interest receivable should be benchmarked at 14% on junk bond rate and, accordingly, he made an adjustment of Rs. 20,75,645/-.
5.5. Fourth issue for consideration is with reference to non-TP matter of excluding communication expenses from export turnover. The AO determined communication expenses and excluded the same from export turnover. Assessee's objection was that the said expenses should be excluded from total turnover also in the context of calculation u/s 10A of the Act.
6. Assessee raised various objections before the DRP and the DRP rejected most of the objections. However on interest one member has rejected the objections where as two of the members did not agree with reference to determination of ALP pertaining to interest. Eventhough, the majority decision of DRP was that rate of interest in international transaction has to be benchmarked against LIBOR Plus certain base points, AO, however, did not implement the direction of the DRP, but, mentioned in page 2 of his order that DRP rejected all the issues, which is not so. Assessee is aggrieved on the above orders of the authorities.
7. As regards the issue of addition on interest, as stated briefly above, majority of the members of the DRP themselves did not agree 5 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. with the TPO benchmarking of interest at Junkbond rate and opined that LIBOR Plus certain basis points should be adopted. This finding was clearly given in para 2 of the DRP's order, which is as under:
"1. In several cases, the issue relating to determination of ALP on interest on loan transactions was considered by the TPO. In all these cases, the TPO applied 14% per annum as the rate of interest on the loans advanced to AEs and determined the interest for adjustment. In this particular case, instead of 14% interest charged by the TPO, we agree for Libor + certain % points, i.e. Libor + 3% for the following reasons.
2. We have gone through the order of the TPO and found severe material deficiencies and inconsistencies in the sand taken by the TPO. Accordingly, we did not accept the decision of the TPO and held that the ALP on interest should be in the range of Libor + certain basis points, depending on some internal CUP available in the tax payer's cases or the external CUP adopted from other cases.
3. Sri F.M. Mohanty, one of the members of the DRP, Hyderabad, had expressed his disagreement with the decision taken. He is of the opinion that it is in appropriate to issue any directions on this matter regarding determination of ALP on loan transactions.
4. Section 144C(5) of IT Act read with sub-section [8] does not mandate the DRP to have any discretion not to issue directions on any particular issue referred to it meaning thereby that any issue referred to it meaning thereby that any issue referred to the DRP has to be disposed off as per the provisions contained in section 144C of the IT Act. While giving his dissent note, Sri F.M. Mohanty ha raised certain issues which need to be clarified for the purpose of record. The same are as under:
i) It is mentioned that DRP, Bangalore, has approved the interest rate of 14% per annum as determined by the TPO in a particular case. He referred to certain decisions of ITAT and High Court according to which the decision given by the coordinate bench needs to be followed by the other benches.
The CBDT did not prescribe any guidelines to follow the decisions of other coordinate benches of DRP. It is seen from the orders that the TPOs themselves are not following uniform decision in respect of any particular issue. Especially in the case of interest payment or interest rates, TPOs in Delhi and Mumbai followed the principle of charging "Libor + certain percentage points". In the case of Perot Systems TSI India Ltd. Vs. DCIT, Circle - 4(1), Delhi [2010] 37 SOT 358 (Delhi), and VVF Ltd. Vs. DCIT [2010] TIOL-55-ITAT-Mumbai, the Hon'ble ITAT have approved them. When TPOs themselves are not following uniformly throughout the country, asking the DRP members who are deciding on the TPOs orders is a farfetched idea. Each case of the TPO will differ based on the facts of the case. Similar is the case with the 9 DRPs located at various cities in the country. The TPO Hyderabad himself is accepting in respect of payment by taxpayer to AEs in respect of the loan obtained by them e.g.,
a) in the case of M/s ADP Pvt. Ltd., the TPO has observed as under:
6 ITA No. 1445/Hyd/2010 CES Pvt. Ltd."The taxpayer has availed external commercial borrowings from its AE, ADP Netherlands BV. The loan agreement was entered into on April 12, 2005 for a tenor of three years for an amount of Euro 3,800,000 and another loan agreement was entered into on July 25,2005 for an amount of USD $2,400,000. The interest payable to the AE is at 2.85% & 4.15%. The taxpayer paid interest at the same rate. As the interest charged is below Libor + 200 basis points, the interest charged is treated as at arm's length."
b) In the case of Kirby Building Systems India Ltd., the TPO found that the taxpayer paid interest on its borrowings from AEs at Libor + 1.5% (5.29% to 5.65% at different points of time). He found comparables as under:
S.No Name of the Amount Rate of
. company borrowed interest (%
(Millions) over Libor)
1. Radico Kahitan US $10 1.50
2. Shiva Cement US $ 7 2.50
3. Tata Chemical US S 20 1.00
Arithmetic 1.67
In the first case, the TPO accepts that interest rate at Libor + 200 basis points is treated as arm's length in a case where loan is given to an Indian entity even though interest rates prevailing in India during the relevant time were of the order of 10 to 14% per annum. In the second case, considering that there is no significant difference between the rate of interest paid by the tax payer and the comparables, no adjustment was proposed.
In both the above instances the TPO has rightly recognized the principle involved i.e. rate of interest in international transactions is benchmarked against Libor + certain basis points (i.e. interest rates prevailing in international money markets) and not against interest rates prevailing in India. Another most question is whether the TPO would have allowed interest @ 14% p.a. in case it was claimed by the tax payers in the above cases, having held ALP of interest on loan at such rate. Definitely not.
In the above cases he accepted 'Libor + certain basis points', whereas for payments he did not accept. This kind of one sided action defies equity and logic. There is no mechanism created by the CBDT to communicate the decisions of all the benches of the DRP among all the DRPs across the country. In the absence of such an organized mechanism, guidelines to follow the same, it cannot be expected to follow the decision given in an isolated case by an isolated bench of the DRP. It is noticed that there are several instances where different benches of the ITAT gave different decisions on the same issue. The TPO uniformly applied the interest rate percentage of 14% to the moneys lent by the taxpayer to its subsidiaries located in China, USA, Switzerland and Brazil. Normally, in respect of calculating ALP in respect of interest payable or receivable in international transactions, it is to go by "Libor + %. Again in calculation of ALP in respect of interest 7 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. payments/receivables one has to take into account the prevailing Libor, the cost of the fund to the taxpayer, the opportunity cost, the country to which it is lent and borrowed, the PLR rates prevailing in those countries and the ratings of the TDS applying uniform interest rate of 14%. We are of the view that here the TPO has erred and hence the Arm's Length Price has been calculated taking the above into criteria. With due respect to our fellow member, on this point, we do not agree with him in approving TPO's action.
ii) In the case of M/s Reddy Laboratories Ltd., there is an issue regarding determination of ALP of interest on loans given to AEs located in different countries. The TPO determined the aLP at 14% per annum uniformly on all such loans. Considering that an appeal is pending before the ITAT against the decision of the CIT(A) who had confirmed the interest rate at 7% per annum, the decision of the TPO has been upheld.
iii) it is mentioned that any direction/decision by DRP other than upholding 14% is likely to prejudice the departmental appeal pending before the ITAT in the case of M/s Reddy Laboratories Ltd. It is seen that the issues relating to transfer pricing have been in vogue for over several years. Various appeals were decided by the CIT(A) and in many cases, many issues were appealed against by the Department before the ITAT. There is no consolidated official record of such decisions which are before the ITAT. Before DRP, we have come across about 12 to 15 issues in all the cases put together. On all these issues, there are several departmental appeals pending before the ITAT for adjudication. If the order of TPO is to be accepted on all those issues DRP cannot take any decision otherwise than upholding all the decisions of the TPO even though they are found to be patently wrong. There are no such guidelines issued by the CBDT for the functioning of the DRPs. In any case, if what is suggested by Sri F.M. Mohanty is to be followed, the whole functioning of the DRP would be paralyzed and unworkable and the institution itself becomes redundant.
iv) There is no appeal by the Department against the orders of the DRP. It is a conscious decision taken by the Government of India not to appeal the decisions taken by a panel consisting of 3 senior commissioners. They are expected to decide the issues judiciously and objectively to the best of their knowledge and ability. Whether there is an appeal against such orders or not is only a consequence and a consequence should not be at the back of the mind while deciding the issues, otherwise the decision itself will be biased.
v) In almost all the cases where the TPO determined ALP of interest at 14%, the Indian entity is the parent and they have extended loans to their AEs located outside the country for the purpose of expanding their business and/or for meeting working capital requirements etc. There is no question of shifting of profit out of the country and on the contrary once the AEs establish themselves in those countries it will be a case of shifting of profits to the country. In any case, a comparison has to be between comparables and not between non-comparables. In all these case, the transactions are between an Indian entity and AEs located outside the country. A comparison could be made to a transaction taking place between two uncontrolled entities one located in the country and 8 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. the other located outside the country where the taxpayer's transactions are being compared with.
vi) As mentioned above, the provisions of section 144C of the IT Act does not give any mandate to the DRP to refrain from deciding any issue on merit and to avoid giving necessary directions to the AO.
8. We agree with the opinion of the majority members of DRP. Junk bond rate can not accepted while analyzing loans advanced internationally. Moreover, this issue is also covered in favour of Assessee by various orders of the coordinate benches of ITAT. In the case of Siva Industries Holdings Ltd., ITA No. 2148/MDS/2010, dated 20-05-2011, the coordinate bench held as follows:
"11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0% optional convertible preferential shares. Thus it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1.4./2005 to 31.3.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted."
9. Further, in the case of Four Soft Ltd., in ITA No. 1495/Hyd/2010, dated 09-09-2011, the coordinate bench held as follows:
"19. We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments 9 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. of the learned departmental representative as we find that he ALP is to be determined for the international transaction, that is, on international loan and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognised and adopted. In our considered view, the DRP rightly directed the assessing officer to adopt the LIBOR plus for the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries [supra]. We do not find any merit in the arguments of the learned counsel for the assessee that the DRP should have adopted the EURIBOR for the purpose of the TP adjustments, as we find that the mostly used and recognised benchmark rate for international loan is LIBOR based. Hence, the DRP rightly directed the assessing officer to adopt the LIBOR rates. We confirm the directions of the DRP. However, by considering the contentions of the learned counsel for the assessee that the actual LIBOR was 4.42% as against the 5.78% approved by the DRP, we find it proper to restore this issue to the file of the assessing officer, to verify the correctness of the claim made by the assessee company. In view of this matter, we remit this matter to the file of the assessing officer to verify the actual average LIBOR prevailed in the financial year relevant to the assessment year under consideration and adopt the interest rate 4.42% if the claim of the assessee is found correct. The ground raised by the assessee on this issue is partly allowed for statistical purpose."
10. According to Assessee, it has advanced a loan of USD$150,000 to CES, USA @ 6% interest per annum. Another loan of USD$ 6,80,000 was converted into equity share capital on 28-02-2006 and the value of interest received upto the date of conversion was at Rs. 15,56,833/-, for which rate of interest calculated at Libor Plus 157 basis points. Since, Assessee has adopted Libor + 1.57% base points, we do not see any reason to restore the matter to the TPO as the said rate of Libor + can be considered as ALP. Accordingly, following the observations of DRP and also findings of the coordinate benches in the above cases, we allow Assessee's contentions on this issue raised in Ground Nos. 18,19 & 20.
11. As regards exclusion of communication expenses, as briefly stated above, while working out deduction u/s 10A, the AO excluded communication expenses from the export turnover. It was the contention that the said expenses should also be excluded from the total turnover. Assessee raised this issue in Ground Nos. 23 & 24.
10 ITA No. 1445/Hyd/2010 CES Pvt. Ltd.This issue is covered in favour of Assessee by the Special Bench of the ITAT in the case of Saksoft and also the decisions of other coordinate benches in the case of Prithvi Information Solutions Ltd. in ITA No. 225/Hyd/2005, dated 12-10-2007 and also in the case of ITO Vs D.E. Block India Software (Pvt.) Ltd. in ITA No. 983 & 984/Hyd/2006, dated 31-012-007. In fact, the AO did mention that the issue is pending by way of reference to Hon'ble High Court. Since the issue was decided in favour of Assessee by the Special Bench as well as coordinate benches, we direct the AO to exclude the said communication expenses from the total turnover also and workout the deduction accordingly. Accordingly, Ground Nos. 23 & 24 are allowed.
12. Ground Nos. 25 & 26 pertaining to levy of interest u/s 234B and initiation of penalty proceedings u/s 271(1)(c) of the Act, which do not require any adjudication.
13. Ground No. 22 is with reference to disallowance of unutilized balance of cenvat credit written off in the books of account and this issue was not argued at the time of hearing nor pressed, therefore, the same is treated as withdrawn.
Software Segment and ITES: determination of ALP u/s 92C of the Act.
14. With reference to ITES, Assessee is objecting to comparables only before us. Even though, Assessee has raised many grounds on various objections taken before the DRP on various filters. Assessee's objections on ITES is with reference to following companies:
1. Maple eSolutions Ltd.:
The contention is to exclude the said company from the list of comparables on the ground that Directors of this company involved in fraud and hence financials are unreliable. Ld. AR relied on the following case law:11 ITA No. 1445/Hyd/2010 CES Pvt. Ltd.
1. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 19.
2. Delhi ITAT order in the case of ITO Vs. CRM Services India Pvt. Ltd. dated 30-06-2011 at para 17.2 holding that financials of these companies are unreliable.
2. Vishal Information Technologies Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that it has different functionality and company outsources its activities. He relied on the following case law:
1. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 17.
2. Mumbai ITAT order in the case of ACIT Vs. Maersk Global Service Central India Pvt. Ltd. where this company is rejected as comparables to ITES.
3. Asit C. Mehta Financial Services Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company merged with Nucleus & Gis India Ltd in Feb. 2006 and also a super normal profit making company. He relied on the following case law:
1. Bangalore ITAT order in the case of Google India Pvt. Ltd.
vide 1368/Bang/2010 where this company is rejected as comparable to ITES.
2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 11 and 15.
3. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mumbai.
4. Spanco Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company acquired Intelenet BPO Services Pvt. Ltd. in Nov. 2005 and also a super normal profit making company. He relied on the following case law:
1. Bangalore ITAT order in the case of Google India Pvt. Ltd.
vide 1368/Bang/2010 where this company is rejected as comparable to ITES.
12 ITA No. 1445/Hyd/2010 CES Pvt. Ltd.2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 11 and 15.
3. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mumbai.
5. Goldstone Infratech Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is engaged in completely different line of business and also having super normal profits. He relied on the following case law:
1. Bangalore ITAT order in the case of Google India Pvt. Ltd.
vide 1368/Bang/2010 where this company is rejected as comparable to ITES.
2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 15.
3. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mumbai.
6. Allsec Technologies Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is having super normal profits. Further it has been experiencing extraordinary events. During the FY 2005-06, this company had gone for a IPO during the relevant previous year and also the company had entered into a share purchase agreement with shareholder of B2K Corporation Pvt. Ltd., which is engaged in the business of inbound and outbound voice, email chat services and information technology services. He relied on the following case law:
1. Bangalore ITAT order in the case of Google India Pvt. Ltd.
vide 1368/Bang/2010 where this company is rejected as comparable to ITES.
2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 11 and 15.
3. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mumbai.
7. Datamics Financial Services Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company does not qualify as comparable as IT enabled service revenue is less than 75% of the total operating revenues. The 13 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. company's revenue from IT enabled services is only 71.9%. He relied on the decision of Delhi ITAT in the case of DCIT Vs. American Express (India) (P) Ltd., [2012] 135 ITD 211 (Delhi)(Trib.)
8. Apex Knowledge Solutions P. Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is engaged in different line of business of E-Publishing which is completely different from Assessee company's business of ITES. He relied on the decision Bangalore ITAT order in the case of Google India Pvt. Ltd. vide 1368/Bang/2010 where this company is rejected as comparable to ITES.
9. Transworks Information Services Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company provides CRM services and also operates in the area of rendering business processing outsourcing services. In the case of Capital IQ information systems (India) Pvt. Ltd, Vishal Information technologies have been excluded as it was engaged in similar services of BPO. He relied on the following case law:
1. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 21.
2. Hyderabad ITAT order in the case of Trinity Advanced Software Labs. Ltd.
3. Bangalore ITAT order in the case of Genisys Integrating Systems (India) Pvt. Ltd.
4. Delhi ITAT order in the case of Agnity India Technologies Pvt. Ltd.
5. Hyderabad ITAT order in the case of Deloitte Consulting India Pvt. Ltd.
15. We have considered the above objections and as coordinate benches have already decided that these companies are not to be selected on various reasons, we uphold the objections of Assessee and direct the TPO/AO to work out the arithmetic mean of PLI on the 14 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. balance of companies. Grounds raised by Assessee on this issue are allowed.
16. With reference to software segment, Assessee objections are as under:
1. Infosys Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is a giant company and is engaged in the development of niche products. He relied on the decision of Hyderabad ITAT in the case of Intoto Software Pvt. Ltd. in ITA No. 1196/Hyd/2010 (32 Taxmann.com 21).
2. Flextronics Software Systems Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that in this company substantial acquisition of Flextroncis International took place on 05-05-2005 and hence cannot be taken as comparable. He relied on Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. 32 Taxmann.com 21.
3. Persistent Systems Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that in this company substantial acquisition of Norwest Capital Partners took placed on 22-11-2005 and hence cannot be taken as comparable. He relied on Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. 32 Taxmann.com 21.
4. KALS Info Systems Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground it has difference in functionality and business model. This company's core area of business includes the development, manufacture and sales & marketing of printers, computers, LCD projectors and color TVs. Additionally it manufactures semiconductors and precision assembly 15 ITA No. 1445/Hyd/2010 CES Pvt. Ltd. robots where as the assessee company is engaged in the software development services. Since it is a super profit making company, cannot be considered as comparable. He relied on the following case law:
1. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide para 15 & 16- 32 Taxmann.com 21.
2. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mumbai.
5. Accel Transmatics Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this is a super profit making company of 44.07% operating profit and difference in functionality and business model and major revenue for the year under consideration is due to an extraordinary event i.e. sale of IP rights in 'Prodigy', a school management system. For AY 2004- 05 has a negative operative margin of (-18.73%.). He relied on the following case law:
1. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide para 15 & 16- 32 Taxmann.com 21.
2. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mumbai.
6. Megasoft Ltd.
The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is a super profit making company and difference in functionality and business model. Further, TPO placed a filter of similar year financial ending i.e., March year ending. However, Megasoft Ltd has a different financial year ending compared to Assessee company i.e., December Year ending and ought not to have considered it as a comparable. He relied on the following case law:
1. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide para 15 - 32 Taxmann.com 21.
2. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mumbai.
3. Dy. CIT Vs. Americal Express (India)(P) Ltd. [2012] 135 ITD 211 (Delhi)(Trib) 16 ITA No. 1445/Hyd/2010 CES Pvt. Ltd.
17. we have considered various objection in the light of material placed before us. Various coordinate benches have already considered the above objections on similarly placed software development companies. Accordingly, these objections of Assessee are accepted and the TPO directed to exclude the above companies and rework out arithmetic mean of PLI.
18. After working out at the arithmetic mean of PLI, if the range is within + or - 5% as per the proviso to section 92C(2), the AO/TPO is also directed to consider the same. Accordingly, various grounds raised on these two issues are considered allowed.
19. In the result, appeal of Assessee is partly allowed.
Pronounced in the open court on 29 th November, 2013.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 29 th November, 2013.
kv
Copy to:-
1) M/s CES Pvt. Ltd., C/o P. Murali & Co., CAs.,
6-3-655/2/3, 1 st Floor, Somajiguda, Hyd - 82.
2) DCIT - Circle - 1(2), Hyderabad.
3) DRP, Hyderabad
4) Addl.CIT(TP) Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.