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TMI Blog2014 (5) TMI 889X X X X Extracts X X X X X X X X Extracts X X X X ..... are services and software products is not available - the company ought to be omitted from the set of comparable companies. Tata Elxsi Ltd. – Held that:- This, company is predominantly engaged in product designing services and not purely software development services - The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee - Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable – the company is not to be considered for inclusion in the set of comparables. Wipro Limited – Held that:- The company is engaged both in software development and product development services - There is no information on the segmental bifurcation of revenue from sale of product and software services - The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him - Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions entered into by the assessee in the relevant period are as under : S. No. Type of transaction Amount paid (Rs.) Amount received (Rs.) 1. Software Services 25,07,61,728 2. Reimbursement of expenses. 74,58,039 3. Reimbursement of expenses. 21,02,620 The TPO vide order under section 92CA of the Act dt.31.10.2011, proposed a T.P. adjustment of Rs.2,34,27,201 to the ALP of international transactions. The Assessing Officer then issued a draft assessment order under section 143(3) r.w.s. 144C of the Act on 20.12.2011 - (i) Proposing an addition on account of T.P. Adjustment to the ALP of Rs.2,34,27,201 and (ii) Recomputation of the eligible deduction under section 10B of the Act by reducing telecommunication charges of Rs.24,50,957; Foreign travel expenses of Rs.2,17,32,445 incurred in foreign currency and Loss on Forex of Rs.65,656 from export turnover without simultaneously reducing the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant, ought to have directed the Learned TPO to determine the arm's length price on the basis of those accepted comparable companies. 7. The Honourable DRP is not justified in upholding the action of the Learned TPO in carrying out a fresh TP study and wholly substituting the comparable companies selected by the Appellant with a new set of comparable companies, without successfully disregarding the manner of application of TNM method by the Appellant. 8. Without prejudice to the above, the Learned DRP has failed to appreciate that the Learned TPO unjustly left out 5 out of 6 companies selected by the Appellant which are to be taken as comparable companies according to his own reasoning in the final list of 20 companies. 9. The Honourable DRP has failed to appreciate that the Learned TPO while rejecting certain comparable companies selected by the Appellant, had indicated one set of reasons in the notice and another set of reasons in his order which renders his order bad. 10. Without prejudice to the above, the Honourable DRP has failed to appreciate that the Learned TPO is not justified in choosing certain companies merely on the information collected under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contention of the Appellant that it is not engaged in providing technical services but is engaged in development and export of computer software. 18. The Honourable DRP is not justified in upholding the action of the Learned ITO in reducing the telecommunication charges of Rs. 24,50,957/- from the export turnover when such expenditure is incurred in respect of a standard facility and the same cannot be wholly attributable to delivery of computer software outside India. 19. Without prejudice to the above, the Honourable DRP is not justified in failing to appreciate that the question of deduction of telecommunication charges of Rs. 24,50,957/- would arise only if the same has been incurred in foreign-exchange and if the same has been incurred in Indian rupee, the question of deduction thereof does not arise. 20. The Hon'ble DRP is not justified in upholding action of the Learned ITO in reducing loss on forex of Rs. 65,656/- from the export turnover where the said loss on forex cannot be wholly attributable to delivery of computer software outside India. 21. Without prejudice to the above, the Honourable DRP is not justified in upholding the action of the Learned ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35.33 6 ICRA Techno Analytics Ltd. 7.92 7 PSI Data Systems Ltd. 5.94 8 Quinnox Consultancy Services Ltd. 9.68 9 Quintegra Solutions Ltd. 19.00 10 R S Software (India) Ltd. 6.30 11 Sonata Software Ltd. 14.39 12 VGL Software Ltd. 20.80 Arithmetic Mean 12.50 The margin earned by the assessee, as per its TP Study, was 13.09% and since this was in excess of the average profit margin of the 12 comparable companies at 12.50% on cost, the assessee treated the international transactions entered into by it as being at arms length. 5.2 The TPO observed that the assessee has characterized itself as a provider of software development services to its Associated Enterprises (AE) and that the assessee used TNMM as the MAM. While accepting the TNMM as the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09. 6. As mentioned in pre-para 4 of this order, in the course of proceedings before us, the learned Authorised Representative submitted that he would make and put forth arguments/contentions only on the comparability or otherwise of individual companies, which in his opinion, are incorrectly included by the TPO in the set of comparable companies, or are incorrectly excluded by the TPO from out of the set of comparable companies chosen by the assessee in its TP Study. The learned Authorised Representative also submitted a chart, schematically explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected or rejected by the TPO as comparable companies to the assessee. We now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart. A. Companies incorrectly adopted by the TPO as per the contentions of the assessee. 7. (1) Avani Cincom Technologies Ltd. 7.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, in the case on hand, which is a different entity from Triology E-Business Software India (P.) Ltd. (supra) 7.4 The learned Authorised Representative, in rejoinder to the submissions of the learned Departmental Representative, contended that the functional profile of the comparable company continues to remain the same for this year also i.e. software products, whereas the assessee in the case on hand provided software development and support services to its AE and therefore it was clearly functionally different. The learned Authorised Representative also reiterated the submissions made earlier that the Annual Report of the comparable company in the public domain was not complete and that the information received by the TPO under section 133(6) of the Act has not been shared with the assessee. 7.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not demonstrated that the facts of Triology E-Business Software India (P.) Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer/TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. 8. (2) Celestial Biolabs Ltd. 8.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee i.e. it is into clinical research and manufacture of bio-products and that it fails the employee cost filter. The TPO, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability Prediction tool CLL-TOX to predict the toxicity of a given molecule. Your company filed IPR by filing under the Copyright/Patent Act (Appraised and funded by Department of Scientific Industrial Research.) The company has developed an ERP product CELL VISION using Microsoft Technologies. Cell Vision is a custom implemented product which caters to the needs of many industrial segments. The company is foreseeing good reserves during the years to come. Your company also developed a portal called Sanjeevani India.Com. (vi) Schedule 7 of the financial statements on page 25 of the Annual Report indicates that the company has significant product development expenditure pertaining to Drug Molecule and Celsuite. (vii) Turnover under Notes on Accounts for financial statements on page 35 of the Annual Report states that the turnover from bio informatics services, data warehousing and mixing, software development, products and services for F.Y. 2007-08 is 2021.12 lakhs. 8.2.2 The assessee also placed reliance in support of its stand that this company be excluded from the list of comparable companies on the following decisions of the co-ordinate benches of this T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Report of this company, it is functionally different from the assessee. In view of the fact that the financial profile and other parameters of this company have not changed during the year under consideration, which fact has been demonstrated by the assessee, following the decision of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India (P.) Ltd. (supra) and Curram Software International (P.) Ltd. (supra), we hold that the company ought to be excluded from the list of comparables. It is ordered accordingly. 9. (3) Infosys Technologies Ltd. 9.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 9.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 10. (4) KALS Information Systems Ltd. 10.1 This was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on the grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 10.2 Before us, the assessee contended that this company is not functionally comparable, as it is into development of software products. The assessee had also submitted that : (i) this company has two segments namely ; Application Software Segment which includes software product revenues, while the 'Training Segment' do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details called out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. As discussed earlier in this order, there is merit in the contention of the learned Departmental Representative that the ruling rendered in the case of Triology E-Business India (P.) Ltd. (supra) was with respect to an earlier period i.e. F.Y. 2006-07 and there cannot be an assumption or presumption that it is applicable for the year under consideration as well. At the same time, we find that the TPO has drawn conclusions on the basis of information obtained under section 133(6) of the Act, which was not in the public domain and could not have been used by the TPO, when the same is contrary to the Annual Report of the company as has been highlighted by the assessee in its submissions. We also find that the co-ordinate bench of this Tribunal in the case of Trilogy E-Busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduct designing services and not purely software development services. The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee. 11.4.2 The Hon'ble Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below : . Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com (P.) Ltd. (supra), we hold that this company cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (2) Quinnox Consultancy Services Ltd. 14.1 This company was selected as a comparable by the assessee in its T.P. Study. It was rejected as a comparable by the TPA on the ground that there was no current year data available. It is submitted by the learned Authorised Representative that current data was available and that the TPO has wrongly rejected this company as a comparable without considering the data available. Since the Assessing Officer has not considered the current year's data which was actually available, while rejecting the company, the learned Authorised Representative pleaded that the issue of the comparability or otherwise of this company may be restored to the file of the TPO for fresh examination in the light of the current data available. 14.2 Per contra, the learned Departmental Representative supported the action of the TPO in excluding this company from the final list of comparables. 14.3 We have heard the rival submissions and perused and carefully considered the material on record. Admittedly there appear to be contrasting claims; of the TPO that this company cannot be taken as a comparable as current year's data pertaining to it is not avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r excluding certain expenses, then the same should also be excluded from the total turnover in the denominator. The relevant operative portion of the finding of the Hon'ble jurisdictional High Court is extracted and reproduced as under : if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover in the denominator also. The reason being that the total turnover includes export turnover. The components of the export turnover in the numerator and denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10-A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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