Appeal Details
Counselvise Citation
[2016] 133 COUNSELVISE.COM (IT) 6076 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 year(s) 29 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
27-01-2016
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
17-12-2015
Assessment Year
2006-2007
Appeal Filed On
29-12-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI D.MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA.NO.1685/HYD/2010 ASSESSMENT YEAR 2006-2007 JDA SOFTWARE INDIA P. LTD., (SINCE MERGED WITH I2 TECHNOLOGIES INDIA P. LTD.,) BANGALORE 560 037 PAN AAECM1111H VS. THE INCOME TAX OFFICER, WARD-2(1), HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. S. RAGHUNATHAN FOR REVENUE : MR. KPC RAO DATE OF HEARING : 22.12.2015 DATE OF PRONOUNC EMENT : 27 .01.2016 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL IS PREFERRED AGAINST THE ORDER OF A.O. UNDER SECTION 143(3) READ WITH SECTION 144C OF THE I.T. ACT, 1961, CONSEQUENT TO THE DIRECTIONS OF THE DRP ORDER DATED 24.09.2010. 2. THE ASSESSEE COMPANY WAS ORIGINALLY INCORPORATED AS M/S. MANUGISTICS SOFTWARE SERVICES (INDIA) P. LTD., ON 08.12.2004 AND LATER ON CHANGED ITS NAME TO JDA SOFTWARE INDIA P. LTD. THIS COMPANY NOW SINCE MERGED WITH I2 TECHNOLOGIES INDIA P. LTD., W. E.F. 01.04.2011, CONSEQUENT TO THE APPROVALS GIVEN BY HI GH 2 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. COURT AT KARNATAKA AND ANDHRA PRADESH VIDE THEIR OR DERS DATED 11.0-4.2012 AND 12.07.2002 RESPECTIVELY. 3. ASSESSEE DURING THE IMPUGNED YEAR HAD INTERNATIONAL TRANSACTIONS (IE) TO AN EXTENT OF RS.22,55,66,318 IN ITS SOFTWARE DEVELOPMENT AND SUP PORT SERVICES TO ITS PARENT COMPANY (AE) IN USA. IT HAD AN OPERATING PROFIT MARGIN OF 12.86% ON COST. FOR THE PURPOSE OF TRANSFER PRICING DOCUMENTATION IT HAD CONSIDERED 36 COMPARABLE CASES AND SELECTED MOST APPROPRIATE METHOD THE TNMM. IT ARRIVED AT OPERAT ING MARGIN OF 12.06% BASED ON 3 YEARS DATA. THE MATTER WAS REFERRED TO TPO FOR DETERMINING THE ALP IN RESPECT OF IE. TPO CONDUCTED FRESH ANALYSIS AND USING ONLY CURRENT YEARS DATA SELECTED 20 COMPARABLES WHEREIN ARITHME TIC MEAN OPERATING PROFIT MARGIN WAS ARRIVED AT 20.67% ON COST. ALLOWING WORKING CAPITAL ADJUSTMENT OF 1.55% HE DETERMINED THE ALP AT 19.12% AND CONSEQUENT ALP AT 119.12% ON OPERATING COST. THE TPO VIDE ORDER DATED 30.10.2009 DETERMINED THE VALUE OF IE AT RS.23,80,7 0,631 AS AGAINST THE PRICE SHOWN BY ASSESSEE AT RS.22,56,66,318, THEREBY, ENHANCING BY AN AMOUNT OF RS.1,25,04,313. ASSESSEE PREPARED OBJECTIONS BEFORE DRP WHICH WERE REJECTED ON THE T.P. ISSUES. ON THE CONSEQUENTIAL ORDER PASSED BY A.O, THE PRESENT APPE AL IS PREFERRED. 4. ASSESSEE FILED CONCISE GROUNDS WITH ADDITIONAL GROUND RAISED AS UNDER : 3 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. CONCISE GROUNDS 1. THE ORDER PASSED BY DISPUTE RESOLUTION PANEL IS LIABLE TO BE SET ASIDE AS A NON SPEAKING ORDER. 2. THE APPELLANT SUBMITS THAT THE TRANSFER PRICING OFFICER AND THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') ERRED IN NOT DELETING THE FOLLOWING COMPANIES FROM THE LIST OF COMPARABLES - (A) KALS INFO SYSTEMS LTD. ('KALS') AND TATA ELXSI LTD. (SEG) [TATA ELXSI] OUGHT TO BE REJECTED AS THEY ARE FUNCTIONALLY DISSIMILAR TO THE APPELLANT. (B) INFOSYS TECHNOLOGIES LIMITED ('INFOSYS'), THOUGH WAS IDENTIFIED AS A COMPARABLE COMPANY BY THE APPELLANT IN ITS TP STUDY, IN VIEW OF THE DIFFERENCES IN THE FUNCTIONS AND RISKS PROFILE AND HIGH LEVEL OF TURNOVER AS OBJECTED IN GROUND NO 4 READ WITH ANNEXURE 4(B) THERETO BEFORE DRP AND SUBMISSION BEFORE LD. DISPUTE RESOLUTION PANEL (PAGE 308 AND 309 OF THE PAPER BOOK 2). (C) THE DRP FURTHER ERRED IN NOT CONSIDERING DELETION OF COMPARABLES - ACCEL TRANSMATIC LTD FOR THE FUNCTIONAL DISSIMILARITIES, AS PER GROUND 5 READ WITH ANNEXURE 5.4 THERETO (PAGE 263 OF PAPER BOOK 2) (D) THE DISPUTES RESOLUTION PANEL FURTHER ERRED IN NOT CONSIDERING DELETION OF COMPARABLES - MEGASOFT LTD., FOR THE FUNCTIONAL DISSIMILARITIES, AS PER GROUND 5 READ WITH ANNEXURE 5.4 THERETO (PAGE 263 OF PAPER BOOK 2). (E) WITHOUT PREJUDICE TO OTHER GROUNDS, THE AOITPO ERRED ON FACTS IN WRONGLY COMPUTING THE MARGINS OF CERTAIN COMPARABLE COMPANIES NAMELY MEGASOFT LIMITED, TATA ELXSI LIMITED AND ACCEL TRANSMATICS LIMITED. THE MARGIN TO 4 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. BE CONSIDERED FOR AFORESAID COMPARABLES ARE AS UNDER : SL.NO. NAME OF THE COMPANY MARGIN AS PER TPO MARGIN TO BE CONSIDERED 1. MEGASOFT LIMITED ONLY THE IT CONSULTING DIVISION 52.74% 16.97% 2. TATA ELXSI LIMITED 27.65% 22.75% 3. ACCEL TRANSMATICS LTD., 44.07% 40.75% F) THE APPELLANT SUBMITS THAT THE LD. TPO HAS CONSIDERED FOLLOWING ADDITIONAL SIX COMPARABLE COMPANIES IN HIS FINAL ORDER, POST TO ISSUE OF SHOW CAUSE NOTICE AND APPELLANT'S REPLY THEREOF WITHOUT PROVIDING ANY OPPORTUNITY FOR THE APPELLANT AND THE DRP FAILED TO DEAL WITH GROUND 7 READ WITH ANNEXURE 7 THERETO SL.NO. NAME OF THE COMPANY 1. IGATE GLOBAL SOLUTIONS LTD., 2. R SYSTEMS INTERNATIONAL LTD., 3. SIP TECHNOLOGIES AND EXPORTS LTD., 4. SYNFOSYS BUSINESS SOLUTIONS LTD., 5. MEGASOFT LTD., 6 . LANCO GLOBAL SOLUTIONS LTD., ADDITIONAL GROUNDS 1. THE LEARNED TPO HAS ERRED IN SELECTING CERTAIN COMPARABLES IN THE ORDER U/S 92CA, WITHOUT CONSIDERING THAT THE SCALE OF OPERATIONS OF THE COMPANIES VIS-A-VIS THE TURNOVER OF THE APPELLANT (VIZ. INR 22.55 CRORES) FOR FY 2005-06. ACCORDINGLY, THE FOLLOWING COMPANIES CANNOT BE COMPARED TO THE APPELLANT ON APPLICATION OF TURNOVER FILTER OF INR 200 CRORES. 5 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. SL.NO. NAME OF THE COMPANY TURNOVER (IN CRS.) MARGIN AS PER TPO 1. IGATE GLOBAL SOLUTIONS LTD., 527.91 15.61% 2. INFOSYS TECHNOLOGIES LTD., 9028 40.38% 3. MINDREE CONSULTING LTD., 448.79 14.67% 4. PERSISTENT SYSTEMS LTD., 209.18 24.67% 5. SASKEN COMMUNICATION LTD., 240.03 13.90% 6. FLEXTRONICS SOFTWARE SYSTEMS LTD., 595.12 27.24% 5. WE HAVE HEARD LD. COUNSEL FOR THE ASSESSEE AND THE LD. D.R. FOR REVENUE. IT WAS PRIMARILY SUBM ITTED THAT MOST OF THE COMPARABILITY ISSUES WERE CONSIDER ED AND ANALYSED BY THE COORDINATE BENCH IN THE CASE OF UN ITED ONLINE SOFTWARE DEVELOPMENT (INDIA) P. LTD., HYDERA BAD VS. ITO, WARD 3(2), HYDERABAD IN ITA.NO.1500/HYD/20 10 DAT E D 20.06.2014 AND MOSTLY COVERED. HOWEVER, WE HAVE EXAMINED THE ISSUES COMPANY-WISE AND DECIDED AS DETAILED HEREAFTER. 5.1. THE TPO FINAL SELECTION OF CASES ARE AS UNDER : SL.NO. C OMPANY NAME OP TO TOTAL COST % 1. AZTEC SOFTWARE LIMITED 18.09 2. GEOMETRIC SOFTWARE LTD (SEG.) 6.70 3. INFOSYS LIMITED 40.38 4. KALS INFO SYSTEMS LTD., 39.75 5. MINDTREE CONSULTING LTD., 14.67 6. PERSISTENT SYSTEMS LTD., 24.67 7. R SYSTEMS INTE RNATIONAL LTD., 22.20 8. SASKEN COMMUNICATION LTD., (SEG.) 13.90 6 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. 9. TATA ELXSI LTD., (SEG.) 27.65 10. LUCID SOFTWARE LTD., 8.92 11. MEDIASOFT SOLUTIONS P. LTD., 6.29 12. R S SOFTWARE (INDIA) LTD., 15.69 13. SIP TECHNOLOGIES & EXPORTS LTD., 3.06 14. BODHTREE CONSULTING LTD., 15.99 15. ACCEL TRANSMATICS LTD., (SEG.) 44.07 16. SYNFOSYS BUSINESS SOLUTIONS LTD., 17.70 17. FLEXTRONICS SOFTWARE SYSTEMS LTD., 27.24 18. IGATE GLOBAL SOLUTIONS LTD., (SEG.) 15.61 19. MEGASOFT LTD., 52.74 20. LANCO GLOBAL SOLUTIONS LTD., 5.27 ARITHMETIC MEAN PLI 20.67% LESS: WORKING CAPITAL ADJUSTMENT 1.55% --------- 19.12% ---------- 6. ASSESSEE IN THE GROUNDS OBJECT TO IN GROUND 2- (A) TO (D) THE FOLLOWING COMPARABLES : 1. KALS INFO SYSTEMS LTD., 2. TATA ELXSI LTD., (SEG.) 3. INFOSYS LTD., 4. ACCEL TRANSMATICS LTD., (SEG.) 5. MEGASOFT LTD., 6.1. THE ABOVE COMPANIES WERE CONSIDERED BY THE COORDINATE BENCH IN DETAIL AND SAME OBJECTIONS WERE REITERATED. THE DETAILED ORDER OF COORDINATE BENCH IN UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) P. LTD., HYDERABAD VS. ITO, WARD 3(2), HYDERABAD IN ITA.NO.1500/HYD/2010 DATED 20.06.2014 ON EACH OF TH E ABOVE COMPANIES IS EXTRACTED AS UNDER : 7 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. IV. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIALS ON RECORD. AS CAN BE SEEN , THE TPO AT PAGE 53 OF HIS ORDER HAS CATEGORIZED THE ASS ESSEE AS A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. TH E COMMENTS OF THE TPO IN THIS REGARD ARE EXTRACTED HE REUNDER FOR THE SAKE OF CONVENIENCE: SOFTWARE PRODUCT COMPANY A COMPANY WHO DEVELOPS A SOFTWARE PRODUCT BY FOLLOWING ALL THE STEPS INVOLVED IN CREATING SOFTWA RE AS EXPLAINED ABOVE FROM DOMAIN ANALYSIS TO TESTING. IN THIS CASE, INTELLECTUAL PROPERTY BELONGS TO THE COMPANY. THE PRODUCTS ARE SOLD GENERALLY ON LICENSE BASIS WHEREIN THE RIGHT TO USE THE SOFTWARE IS TRANSFERRED WITHOUT GIVING THE SOURCE CODE. THESE TYPES OF COMPANIES ARE NOT SIMILAR TO THE TAXPAYER, WHO IS A PURE SERVICE PROVIDER. PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER DOES A PORTION OF THE DESCRIBED SOFTWARE DEVELOPMEN T LIFE CYCLE. IT DOES NOT GENERATE ANY INTELLECTUAL PROPERTY FOR ITS OWN. THE INTELLECTUAL PROPERTY GENERATED BELONGS TO THE CUSTOMER AND NOT TO THE SERVICE PROVIDER. THE TAXPAYER FALLS IN THIS CATEGO RY. THUS COMPARABLES ARE ALSO TO BE CHOSEN FROM COMPANIES WHOSE SIGNIFICANT ACTIVITIES (> 75% OF TH E OPERATING REVENUES) ARE IN THE NATURE OF OR RELATE TO SOFTWARE DEVELOPMENT SERVICES. AS CAN BE SEEN FROM THE ABOVE EXTRACTED PORTION, TH E TPO HAS HIMSELF MENTIONED THAT A PURE SOFTWARE DEVELOP MENT SERVICE PROVIDER DOES NOT GENERATE ANY INTELLECTUAL PROPERTY FOR ITS OWN. HE HAS FURTHER STATED THAT, THE COMPAN IES WHICH SELL THEIR PRODUCTS GENERALLY ON LICENSE BASI S WHEREIN THE RIGHT TO USE THE SOFTWARE IS TRANSFERRED WITHOU T GIVING SOURCE CODE CANNOT BE COMPARABLE TO PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER LIKE ASSESSEE. IT IS T HE SPECIFIC CONTENTION OF THE LEARNED AR THAT ACCEL TRANSMATIC LTD., HAS SOLD IP RIGHTS FOR THE SOFTWARE DEVELOPED BY IT. FURTHER, IT IS ALSO THE CONTENTION OF THE 8 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. ASSESSEE THAT THIS COMPANY FAILS THE RPT FILTER OF MORE THAN 25% APPLIED BY THE TPO HIMSELF. IN CASE OF HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO (SUPRA), THE I TAT BANGALORE BENCH WHILE EXAMINING THE ISSUE OF COMPARABILITY OF THE AFORESAID COMPANY TO A PURELY SOFTWARE DEVELOPMENT SERVICE PROVIDER HAS HELD AS U NDER: IN SO FAR KALS INFO SYSTEMS LTD., AND ACCEL TRANSMATICS LTD., CHOSEN BY THE TPO AS COMPARABLES, THIS TRIBUNAL IN THE CASE OF TRILOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) HAS TAKEN A VIEW THAT THESE COMPANIES ARE NOT COMPARABLE TO THE SOFTWARE SERVICE PROVIDER COMPANIES AS THEY ARE FUNCTIONALLY DIFFERENT. THE FOLLOWING ARE THE RELEV ANT OBSERVATIONS OF THE TRIBUNAL IN THIS REGARD:- 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTENTION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDES THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED IN PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE ANNUAL REPORT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS RS.45, 93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILTER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE. PUNE BENCH TRIBUNAL'S DECISION OF THE ITA T IN THE CASE OF BIND VIEW INDIA PRIVATE LIMITED VS. DC/, 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 KA/S INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUSION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 9 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. 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, ETE. 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 ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE TPO HAS DRA WN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.06.2010 TO THE TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITA T HAS HELD THAT THIS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT 10 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOPMENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. C/T 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RELEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: 'IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THAT THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENTRE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL LT ACADEMY (THE NET STOP FOR ENGINEERS)- TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/8PO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCE/TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY AS I T WAS ENGAGED IN THE SERVICES IN THE FORM OF ACCEL IT 11 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. AND A CC EL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEE'S CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED DRP THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. ' 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN THE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARABILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE ID. DR, ON THE OTHER HAND RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID COMPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFERRED TO BY THE ID. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THIS COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGUMENT OF THE ID. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFORESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. ' 13. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUNAL, KALS INFO SYSTEMS LTD., AND ACCEL TRANSMATICS LTD. ARE TO BE EXCLUDED FOR THE PURPOSE OF COMPARISON WHILE DETERMINING THE ALP OF THE IMPUGNED TRANSACTION IN THIS APPEAL. IT IS ORDERED ACCORDINGLY. FACTS BEING MATERIALLY SAME AND SINCE IT PERTAINS T O THE SAME ASSESSMENT YEAR, FOLLOWING THE VIEW ADOPTED BY THE ITAT, BANGALORE BENCH IN THE AFORESAID CASE, WE ARE ALSO 12 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. OF THE VIEW THAT THIS COMPANY CANNOT BE COMPARABLE TO THE ASSESSEE. FOR THE VERY SAME REASONS, II . KALS INFO. SYSTEMS LTD. ALSO CANNOT BE A COMPARABLE TO THE ASSESSEE. WE, THEREFORE, DIRECT THE AO/TPO TO EXCLUDE THE AFORESA ID COMPANIES FROM THE LIST OF COMPARABILITY ANALYSIS. III. MEGASOFT LTD. I. OBJECTING TO THE AFORESAID COMPANY BEING TREATE D AS COMPARABLE, THE LEARNED AR SUBMITTED THAT AS PER TH E INFORMATION OBTAINED FROM THE SAID COMPANY U/S 133( 6) OF THE ACT, THE ANNUAL REPORT OF THE COMPANY CLEARLY I NDICATES THAT IT IS ALSO ENGAGED IN SELLING OF PRODUCTS, NAM ELY, XIUS SUIT OF PACKAGED PRODUCTS. IT WAS SUBMITTED THAT SI NCE SEGMENTAL FINANCIAL RESULTS IN RESPECT OF PRODUCT A ND SERVICES ARE AVAILABLE IN RESPECT OF THIS COMPANY, IF AT ALL THIS COMPANY IS TO BE TREATED AS COMPARABLE, THE TP O MAY BE DIRECTED TO CONSIDER THE PROFIT MARGIN OF SOFTWA RE DEVELOPMENT SERVICES SEGMENT ALONE WHICH IS 16.97%, IN RESPECT OF SUCH CONTENTION, THE LEARNED AR RELIED U PON THE FOLLOWING DECISIONS: 1. TRILOGY E BUSINESS SOFTWARE INDIA PVT. LTD. (ITA NO.1054/BANG/2011) 2. LG SOFT INDIA P. LTD. (TS-64-ITAT-2013(BANG.-TP) 3. BEARING POINT BUSINESS CONSULTING PVT. LTD. (ITA NO.1124/BANG/2011) 4. INTOTO SOFTWARE INDIA PVT. LTD. (ITA.1196/H/2010) 5. TRANSWHICH INDIA P. LTD., VS. DCIT (ITA.NO.948/BANG/2011). 6. MERCEDEZ BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD., (ITA.NO. 1222/BANG/2011). 7. HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO (ITA NO.1338/BANG/2010). 13 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. II. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT THE TPO HAVING CORRECTLY CONSIDERED THE PROFIT MARG IN OF THE COMPANY BY EXAMINING THE ANNUAL REPORT THERE IS NO NEED TO MODIFY THE ORDER OF THE TPO IN THIS REGARD. III. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIALS ON RECORD. ON A CONSIDERATION OF THE CONTENTIONS RA ISED BY THE ASSESSEE VIS--VIS MATERIALS ON RECORD AS WELL AS DECISIONS OF DIFFERENT BENCHES OF THE TRIBUNAL PLA CED BEFORE US, IT IS QUITE EVIDENT THAT THIS COMPANY HAS TWO S EPARATE SEGMENTS I.E. PRODUCT AND SERVICES. THEREFORE, IF A T ALL, THE AO/TPO CONSIDERS THE AFORESAID COMPANY TO BE A COMPARABLE, THEN, HE IS DIRECTED TO CONSIDER SOFTWA RE DEVELOPMENT SERVICES SEGMENT ALONE FOR COMPARABILIT Y ANALYSIS. IV, INFOSYS TECHNOLOGIES LTD. I. OBJECTING TO THIS COMPANY, THE LEARNED AR SUBMI TTED THAT UNDER NO CIRCUMSTANCES, THIS COMPANY CAN BE CONSIDERED AS COMPARABLE, TO A SMALL CAPTIVE SERVIC E PROVIDER LIKE ASSESSEE. IT WAS SUBMITTED THAT INFO SYS IS ENGAGED IN DIVERSIFIED ACTIVITIES INCLUDING PRODUCT S, CONSULTANCY & SOLUTIONS. IT COMMANDS A PREMIUM IN T HE PRICING OF ITS PRODUCTS AND SERVICES DUE TO ITS GOO DWILL, REPUTATION AND BRAND VALUE. FURTHER, DUE TO SCALE OF OPERATIONS, INFOSYS ENJOYS ECONOMIES OF SCALE, WHIC H RESULTS IN LOWER COST OF INFRASTRUCTURAL FACILITIES AND OVERHEADS. FINALLY, THE LEARNED AR SUBMITTED THAT T HE ISSUE OF COMPARABILITY OF INFOSYS TO A CAPTIVE SERVICE PR OVIDER IS NO LONGER RES INTEGRA, DUE TO FOLLOWING DECISIONS O F THE DIFFERENT BENCHES OF THE TRIBUNAL : 1. TELCORDIA TECHNOLOGIES INDIA P. LTD. (ITA NO. 7821/MUM/2011-PARA 7.4) 2. ADAPTEE (INDIA) PVT. LTD. VS. DCIT (ITA NO. 1801/HYD/2009) 3. PATNI TELECOM SOLUTIONS PVT. LTD., VS. ACIT (ITA NO. 1846/HYD/2012) 4. TRILOGY E BUSINESS SERVICES SOFTWARE LTD. VS. DCIT (ITA NO. 1054/BANG/2011 PARA 20) 5. AGNITY INDIA TECHNOLOGIES VS. ITO (ITA NO. 3856/DEL/2010) 14 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. 6. AGNITY INDIA TECHNOLOGIES PVT. LTD. VS. ITO (HIGH COURT DECISION) ITA NO. 1204/2011 7. HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO (ITA NO. 1338/BANG/2010) (AY 2006-07 8. CINCOM SYSTEMS INDIA P. LTD., VS. ACIT (ITA NO. 761/DEL/2012 (AY 2006-07) 9. ADOBE SYSTEMS INDIA PVT. LTD. (TS-320-ITAT-2011 (DEL.) 10. VIRTUSA INDIA PVT. LTD., VS. DCIT (ITA NO. 1962/H/2011) 11. INTOTO SOFTWARE INDIA PVT. LTD. (ITA NO. 1196/H/2010) II. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE DRP & TPO. III. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIALS ON RECORD AS WELL AS DECISIONS RELIED UPON BY THE L EARNED AR. UNDISPUTEDLY, THE TPO HAS ACCEPTED THE FACT TH AT THE ASSESSEE IS PURELY A SOFTWARE DEVELOPMENT SERVICE P ROVIDER TO ITS AE WHEREAS INFOSYS IS NOT A CAPTIVE SERVICE PROVIDER LIKE ASSESSEE. IT IS A FACT THAT INFOSYS IS ENGAGE D IN DIVERSIFIED ACTIVITIES AND ALSO ENGAGED IN DEVELOPM ENT OF PRODUCTS CONSULTANCY AND SOLUTION. THAT APART, THE SIZE, REPUTATION AND BRAND VALUE OF INFOSYS, IN NO WAY M AKES IT COMPARABLE TO A SMALL CAPTIVE SERVICE PROVIDER LIKE ASSESSEE. THEREFORE, FOLLOWING CONSISTENT VIEW OF D IFFERENT BENCHES OF TRIBUNAL, WE EXCLUDE THIS COMPANY FROM T HE LIST OF COMPARABLES. IV. TATA ELXSI LTD. (SEG.) I. OBJECTING TO THE AFORESAID COMPANY BEING TREATED AS COMPARABLE, THE LEARNED AR SUBMITTED THAT THE SAID COMPANY SHALL BE REJECTED AS COMPARABLE SINCE IT IS A SPECIALIZED EMBEDDED SOFTWARE DEVELOPMENT COMPANY. FURTHER, HE SUBMITTED THAT AS PER THE INFORMATION O BTAINED FROM THE SAID COMPANY U/S 133(6) OF THE ACT, IT WAS STATED THAT DUE TO THE COMPLEX SEGMENTS IN WHICH THEY ARE OPERATING, IT IS NOT COMPARABLE TO ANY OTHER SOFTWA RE SERVICES COMPANY. THE AR RELIED ON THE FOLLOWING PRECEDENTS IN SUPPORT OF HIS SUBMISSIONS : 15 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. 1. CONEXANT SYSTEMS INDIA PT. LTD., (ITA NO. 1429/HYD/2010 AND 1978/HYD/2011) 2. TELCORDIA TECHNOLOGIES INDIA P. LD., (ITA NO. 7821/MUM/2011) 3. LOGICA PVT. LTD. (IT(TP)A NO. 1129/BANG/2011) 4. HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO (ITA NO. 1338/BANG/2010) AY 2006-07 II. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE DRP & TPO. III. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIALS ON RECORD AS WELL AS DECISIONS RELIED UPON BY THE L EARNED AR. W E FIND THAT IN CASE OF HUAWEI TECHNOLOGIES INDIA PVT. LTD. VS. ITO (SUPRA), ITAT BANGALORE BEN CH EXCLUDED THIS COMPANY RELYING UPON THE DECISION OF ITAT, MUMBAI BENCH IN CASE OF TELCORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) PERTAINING TO THE SAME ASSESSMENT YEAR I.E. 2006-07. IV. FOLLOWING THE VIEW EXPRESSED BY BANGALORE AND MUMBAI BENCHES, OF THE TRIBUNAL, WHICH IS IN RELATI ON TO A.Y. 2006-07, WE ARE OF THE VIEW THAT TATA ELXSI LTD. IS ALSO TO BE EXCLUDED FROM THE LIST OF COMPARABLES WHILE DETERMINING THE, ALP OF THE INTERNATIONAL TRANSACTION. 6.2. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT TH E A.O. TO EXCLUDE THE FOLLOWING COMPARABLES. 1. ACCEL TRANSMATIC LTD., 2. KALS INFO SYSTEMS LTD., 3. INFOSYS LTD., 4. TATA ELXSI LTD., (SEG.). SO FAR AS MEGASOFT LTD., IS CONCERNED, THE TPO IS D IRECTED TO CONSIDER ONLY SEGMENTAL DETAILS PERTAINING TO SO FTWARE DEVELOPMENT SERVICE ONLY. ORDERED ACCORDINGLY. 16 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. 6.3. AS FAR AS GROUND 2(E) IS CONCERNED, WE HAVE ALREADY EXCLUDED THE COMPANY TATA ELXSI AND ACCEL TRANSMATIC LTD., SO FAR AS MEGASOFT LTD., IS CONCER NED, THE A.O./TPO IS DIRECTED TO EXAMINE THE MARGIN TO BE CONSIDERED AS DIRECTED ABOVE IN PARA 6.2. 6.4. GROUND NO.2(F) IS ON THE ISSUE THAT PROPER OPPORTUNITY WAS NOT GIVEN TO THE ASSESSEE BY TPO IN SHOW CAUSE AND DRP FAILED TO EXAMINE THE GROUND-7 RAISED BEFORE THEM. HOWEVER, THIS BECOMES ACADEMIC AS THE ASSESSEE HAS NOT MADE SERIOUS OBJECTIONS BEFORE DRP AND IN MANY CASES THE COMPARABLES WERE EXAMINED AND ACCEPTED. IN THE CASE OF MEGASOFT LTD., THIS BENCH ALSO CONSIDERED AND GAVE DIRECTION TO CONSIDER ONLY SEGM ENTAL PROFIT IN PARA 6.2 ABOVE. THEREFORE, WE ARE OF THE OPINION THAT NO USEFUL PURPOSE WOULD BE SERVED EVEN IF THE MATTER IS REFERRED TO TPO FOR GIVING AN OPPORTUNITY, CONSI DERING THAT CONSIDERABLE TIME HAS SINCE PASSED AND MANY OF THE COMPANIES WERE THOROUGHLY EXAMINED IN MANY OTHER CASES SO FAR AS A.Y. 2006-07 IS CONCERNED. THE GROU ND IS ACCORDINGLY REJECTED. 7. ASSESSEE CONTENDS THAT THE COMPARABLE STATED IN ADDITIONAL GROUND SHOULD BE REJECTED ON TURNOVER BASIS. ASSESSEES TURNOVER IS ABOUT RS.22.55 CRORES. OUT O F THESE COMPANIES OBJECTED IS IN ADDITIONAL GROUND, WE HAVE ALREADY CONSIDERED INFOSYS LTD., (LIST-2 IN GROUND) AND REJECTED ON VARIOUS OTHER REASONS AS WELL. WITH REF ERENCE TO THE OTHER FIVE COMPANIES, TWO COMPANIES VIZ., 17 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. PERSISTENT SYSTEMS LTD., AND SASKEN COMMUNICATION L TD., (SEG.) HAS TURNOVER OF JUST ABOVE RS.200 CRORES (LE SS THAN 10 TIMES) AND THE THREE COMPANIES VIZ., IGATE GLOBA L SOLUTIONS LTD., (SEG.) MINDTREE CONSULTING LTD., AN D FLEXTRONICS SOFTWARE SYSTEMS LTD., HAS ABOVE RS.500 CRORES (JUST MORE THAN 20 TIMES). THIS SCALE OF TUR NOVER CANNOT BE CONSIDERED EXTRAORDINARY SO AS TO EXCLUDE THEM ON TURNOVER BASIS. WE ALSO NOTICE THAT ASSESSEE HAS NOT RAISED ANY OBJECTION TO LOWER TURNOVER COMPANIES LI KE LUCID SOFTWARE LTD., (1.02CR SALES TURNOVER), MEDIA SOFT SOLUTIONS P. LTD., (1.76CR) WHICH ARE IN THE SAME SCALE/RANGE ON LOWER SIDE, AS ASSESSEE TURNOVER BEI NG 22.55 CRORES. CONSIDERING THIS, WE ARE OF THE OPINI ON THAT THE BALANCE 5 COMPANIES CANNOT BE REJECTED ONLY ON TURNOVER BASIS WHICH WAS RAISED AS AN ADDITIONAL GR OUND BEFORE US, WITHOUT HAVING ANY OBJECTIONS EARLIER. T HIS GROUND IS ACCORDINGLY REJECTED. 8. THE A.O./TPO IS DIRECTED TO MODIFY THE O RDER ACCORDINGLY. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27.01.2016. SD/- SD/- (D.MANMOHAN) (B.RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER HYDERABAD, DATED 27 TH JANUARY, 2016 VBP/- 18 ITA.NO.1685/HYD/2010 JDA SOFTWARE INDIA P. LTD., BANGALORE. COPY TO 1. JDA SOFTWARE INDIA P. LTD., (SINCE MERGED WITH I2 TECHNOLOGIES INDIA P. LTD.,) 132/133, DIVYASHREE TECHNOPLOIS, YAMLUR POST, OFF OLD AIRPORT ROAD, BANGALORE 560 037 2. THE INCOME TAX OFICER, WARD - 2(1), HYDERABAD. 3. DISPUTES RESOLUTION PANEL, 4A, I.T. TOWERS, A.C. GUARDS, HYDERABAD 500 004. 4. ADDL. CIT (TRANSFER PRICING) , HYDERABAD. 5. D.R. ITAT B BENCH, HYDERABAD 6. GUARD FILE.
