Decided on June 04,2014

Invensys Development Centre India Pvt. Ltd. Appellant


SAKTIJIT DEY,JM. - (1.) THIS appeal by the assessee is directed against the assessment order passed u/s 143(3) read with section 144C of the IT Act, 1961 relating to the assessment year 2007 -08.
(2.) BRIEFLY the facts are, the assessee an Indian Company incorporated on 19th June, 2003 is a wholly owned subsidiary of Invensys group (hereinafter referred to as IDC US or AE). The assessee is primarily engaged in the business of providing software development services and quality assurance and support services to its group companies overseas. For provision of software services to AEs, the assessee is remunerated at cost plus 10% mark up. For the impugned assessment year, the assessee filed its return of income on 18 -10 -2007 declaring income of Rs.4,29,71,063/ -. During the previous year relevant to the assessment year under consideration, the assessee reported revenue of Rs.47,99,84,033/ - towards provision of software development services. The assessee undertook TP study through an external consultant to benchmark the ALP of the International Transaction. In the TP study, TNMM was adopted as the most appropriate method. The assessee selected 28 companies as comparables by undertaking a search in databases having average PLI of 14.53%. As assessee's margin was 10.69%, the price charged for the international transaction was found to be within arm's length. The Assessing Officer in course of scrutiny assessment proceedings noticing that revenue earned from international transaction with its AE has exceeded the threshold limit made a reference to the TPO for determining the ALP. The TPO after analysing the TP study of the assessee and other connected documents though accepted TNMM as the most appropriate method, however he rejected the TP report of the assessee basically on the ground that the assessee has taken into consideration multiple year data in case of 22 out of the 28 comparables selected. The TPO also noted that the assessee has not properly followed the criteria while accepting/rejecting the comparables as verticals/horizontals of software industry were not considered. He further noted that the assessee while applying the accept/reject matrix has omitted various companies though they were functionally similar to the assessee and has including certain companies which are not at all comparable. After rejecting the TP study of the assessee by pointing out various defects/deficiencies, the TPO by adopting some of the filters applied by the assessee and applying certain additional filters undertook a search in the databases which yielded 26 comparables with an average margin of 25.14%. After allowing adjustment towards working capital at 2.40%, the adjusted arithmetic mean PLI was worked out to to 22.74%. By applying the aforesaid Arithmetic Mean PLI to the operating cost of Rs.43,39,20,487/ - the ALP was determined at 53,25,94,005/ -. The price charged by the assessee towards international transaction being Rs.47,99,84,033/ -, shortfall of Rs.5,26,09,973/ - was treated as adjustment to be made u/s 92CA of the Act. As a consequence of the order passed by the TPO, the Assessing Officer passed a draft assessment order adding transfer pricing adjustment of Rs.5,26,09,972/ -. Being aggrieved of the proposed addition, assessee raised objections before the DRP on various grounds. The DRP however rejected almost all objections raised by the assessee except in case of one of the comparables selected by the TPO i.e. M/s Celestial Labs limited which was directed to be excluded by the DRP.
(3.) BEING aggrieved of the order passed by the DRP the assessee is before us raising as many as 12 grounds. Ground No.1 to 10 are on transfer pricing issue. At the very outset, the learned AR submitted before us that he wants to restrict his arguments to the following three issues. 1) Ground No.6 selection of comparables by the TPO 2) Ground No.7, Rejection of comparables by the TPO 3) Ground No.9 - adjustment for risk differences. So far as groundNo.6 is concerned, out of 26 comparables selected by the TPO, the assessee objected to selection of seven comparables. Hereinafter, we will deal with each of the comparables objected to by the assessee. AVANI CIMCON TECHNOLOGIES LIMITED : Assessee has basically sought exclusion of above company on two grounds, firstly, this company has revenue from both product and software services and segment -wise data is not available and secondly, it is contended that the company has shown super normal profit of 50.74% against average margin of other comparables. It is very much evident from the TP order that the assessee has been categorised as a software development service provider. Coordinate Bench of this Tribunal in the case of Virtusa (India) Pvt. Ltd. (ITA No. 1962/Hyd/2011 dated 30/08/2013) after following some other decisions of the Tribunal has held this company cannot be treated as comparable as this company is also into product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with the assessee. As the aforesaid decision of the Coordinate Bench pertained to the same assessment year i.e. A.Y. 2007 -08, following the same, we hold that this company cannot be treated as comparable to the assessee. Other cases considered the same comparable and rejected are as under: a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.1978/H2011 c) Intoto Software India P. Ltd. ITA.2102/H/2010 d) Telcordia Technologies India P. Ltd. ITA.7821/Mum/2011 e) TriologyE -BusinessSolutions ITA.No.1054/Bang/2011 f) Bearing Point Business ITA.No.1124/Bang/2011 g) LG Soft India Pvt. Ltd. ITA.No.1121/Bang/2011 h) Transwitch India P. Ltd. ITA.No.948/Bang/2011 i) Mercedes Benz Research and Development ITA.No.1222/Bang/2011 j) CSR India P. Ltd. ITA.No.1119/Bang/2011 k) First Advantage ITA.No.1086/Bang/2012 l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011 We therefore direct the Assessing Officer /TPO to exclude this company while computing ALP. INFOSYS TECHNOLOGIES LTD., : ;

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