M/S KBACE TECHNOLOGIES PRIVATE LIMITED ,CHENNAI vs. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1)(1), BANGALORE

Though the assessee has raised many grounds, the Ld A.R restricted his arguments to the selection of comparable companies relating to the addition made on account of Transfer Pricing adjustment. Accordingly, we have restricted ourselves to the IT(TP)A No.233/Bang/2018 selection of comparable companies. Accordingly, all other grounds are not adjudicated.

The facts relating to the above said issue are discussed in brief. The assessee herein is a wholly owned subsidiary of KBACE Technologies Inc., USA. It is engaged in the business of providing Software Development Services to KBACE, USA. During the year under consideration, the assessee has entered following international transactions with its Associated Enterprise (AE):- Service Income - Rs.1619.69 lakhs Deferred Receivables - Rs.1630.28 lakhs The assessee adopted TNMM method as most appropriate method and the Profit Level Indicator (PLI) was taken as Operating Margin/Operating Cost. The PLI of the assessee was worked out to 14.16%. The arithmetic mean of PLI of comparable companies selected by the assessee worked out to 12.16%. Accordingly, the assessee submitted that its international transactions with AE were at arms length.

The TPO rejected the Transfer Pricing Study of the assessee by pointing out various types of deficiencies with regard to the companies selected by the assessee. The TPO selected his own set of comparable companies consisting of 7 companies as detailed below, whose average margin (OP/OC) worked out to 20.90%:- 1. C G-VAK Software & Exports Ltd 20.54% 2. ICRA Techno Analytics Ltd 17.10% 3. Larsen & Toubro Infotech Ltd 26.06% 4. Mindtree Ltd (Seg.) 18.19% 5. Persistent Systems Ltd (Seg) 28.27%

The Ld DRP excluded one comparable company named ICRA Techno Analytics Ltd and confirmed the remaining six comparable companies selected by the TPO.

The Ld A.R submitted that the turnover of the assessee company is Rs.16.19 crores during the year under consideration. Accordingly it falls in the category of Rs.1 to 200 crores. He further submitted that the turnover of following comparable companies selected by TPO exceeds Rs.200 crores and accordingly submitted that these companies are required to be excluded on “turnover filter”. Name of company Turnover (a) Larsen & Toubro Infotech Ltd - 3613.42 crores (b) Mind Tree Limited - 1640.80 crores (c) Persistent Systems Ltd - 996.50 crores (d) R.S. Software India Ltd - 293.22 crores (e) Tech Mahindra Ltd - 6001.90 crores

The Ld D.R also concurred with the view of Ld A.R that the above said five companies are required to be excluded on the IT(TP)A No.233/Bang/2018 criteria of turnover filter. The Ld A.R submitted that an identical view has been taken by the co-ordinate bench in the case of Mobility Infotech India P Ltd (IT(TP)A No.2055/bang/2016). Accordingly, we direct the AO/TPO to exclude above cited five companies.

The Ld A.R submitted that the following three companies selected by the assessee in its T.P study has been wrongly rejected by the TPO:- (a) Cogniti Technologies Ltd:- The TPO had rejected this company by holding that this company is engaged in the business of software testing services and hence functionally different. It is the submission of Ld A.R that this company has been accepted as comparable company by the TPO himself in AY 2014-15. (b) Lucid Software Limited :- The TPO had rejected this company on the reasoning that no data is available in the database. The Ld A.R submitted that the data was furnished by the assessee. (c) Sankhya Infotech Ltd :- The TPO had rejected this company on the reasoning that it fails in Forex filter, engaged in software product development and possesses significant intangible assets. Before us, the Ld A.R submitted that the TPO had rejected this company on the reasoning that this company is involved in software product development. He further submitted that this company was not involved in software product development activities during the year under consideration and it has derived its revenue from software services only.

We heard Ld D.R and perused the record. With regard to Cogniti Technologies Ltd and Lucid Software Ltd, we are of the view that they should be restored to the file of AO/TPO for examining them afresh in the light of new facts brought before us. Accordingly, we restore both the companies to the file of AO/TPO.

With regard to Sankhya Infotech Ltd, the claim put forth before us by the assessee is contradictory to the findings given by TPO. Hence we are of the view that this company also requires examination afresh. Accordingly, we restore this company also to the file of AO/TPO.

The Ld A.R prayed that the following three companies may also be taken as comparable companies. (a) Caliber Point Business Solutions Ltd (Seg) (b) CAT Technologies Ltd (c) Evoke Technologies P Ltd He submitted that the assessee had prayed for inclusion of above said three companies before Ld DRP. However, Ld DRP rejected the prayer of the assessee on the reasoning that the claim to include these three companies was not made before TPO. The Ld A.R submitted that the purpose of T.P study was to determine the Arms Length Price of the international transactions and there is no bar under the Act that the assessee cannot make such claims before the appellate authorities.

We heard Ld D.R on this issue. We notice that the Special bench of Tribunal has held in the case of DCIT vs. Quark Systems P Ltd (42 DTR 414) that the non-comparable companies, even if it

Needless to mention that the assessee should be provided with adequate opportunity of being heard. After examining the contentions of the assessee, the tax authorities may take appropriate decision in accordance with law.