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TMI Blog2014 (10) TMI 424X X X X Extracts X X X X X X X X Extracts X X X X ..... ing related services to the Greenfield Group. Certain international transactions were reported in the requisite Form. The assessee is compensated on a time cost or fixed price basis for the projects assigned. Greenfield US is providing end to end information technology services which include the provision of consulting and systems integration services to managing IT and business functions on behalf of its customers. The dispute raised in the present appeal is in relation to the international transactions of receipt of revenue amounting to Rs. 17,81,69,412/- from Greenfield US, stated to be towards the provision of contract IT services. The assessee benchmarked its international transactions by using Transactional Net Margin Method (TNMM) with the profit level indicator (PLI) of Operating profit/Operating cost. The assessee was compensated by its AE at a mark-up of 15% on costs incurred by it. The assessee claimed that it did not own any intangibles, conducted no research and development activities and, hence, did not carry out any risk related activities. Certain comparables were chosen by the assessee with their financial results for the period ending between 1.4.2004 to 15.02.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer made the addition on account of transfer pricing adjustment to the tune of Rs. 1.55 crore vide the impugned order, against which the assessee has come up in appeal before us. 5. We have heard the rival submissions and perused the relevant material on record. As the assessee has objected to the inclusion of companies chosen by the TPO as comparable largely on functional analysis, it becomes sine qua non first to analyze the functional profile of the assessee with a view to determine the functionality of the assessee so as to decide whether the companies chosen by the TPO are comparable or not. 6. It can be seen from page 2 of the TPO's order, wherein the business profile of the assessee has been discussed, that the assessee rendered software development and related services to Greenfield Group. For the sake of completeness and to precisely ascertain the assessee's correct functional profile, we refer to the copy of the assessee's Transfer pricing study report which has been placed at pages 1-48 of the paper book. Greenfield Group is a leading provider of internet service solutions. Para 1.2.4 of the TP study report presents that Greenfield US owns virtually all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the unique web link to the survey. The e-mail invitation also talks of the payout that will be given for taking part in this survey. Once the survey is live, the sampling team monitors the progress of completes received for each survey. They also send reminders or new invites based on the results being achieved from the hosting of survey. Once the required number of completes are received, the survey is closed and handed over for Data Processing....... (c) DATA PROCESSING - Data processing is the next step. In this step, the teams prepare the data for presentation to the client. The data is cleaned and re- formatted so that client can analyze it. The output format depends on the requirements specified by the client. To verify that the data is accurate, a sanity check is done by generating various kinds of reports. The reports are called Marginals and Frequencies........ (d) SOFTWARE DEVELOPMENT - This group within Greenfield India focuses on development/enhancement of software projects that relate to business automation, increase in efficiency and making the business easier for specific functions performed by Greenfield India. They also contribute to web-site re-design, enhance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llectual property rights of such ultimate product ordinarily vest in the software product company. The software service provider simply plays some role assigned to him in the entire process, who does not acquire any intellectual property rights of the work done by him. 9. We do not agree with this view canvassed by the ld. AR in view of the discussion made above about the functional divisions of the assessee, which makes it vivid that the assessee is both a software service provider and also a software developer. The TPO has nowhere acknowledged in his order, as argued by the ld. AR, that the assessee is only a software service provider. While discussing the Business Profile of the company in para 2.2 of his order, the TPO has mentioned in no uncertain terms that the assessee : "is in the business of providing software development and related services to Greenfield Group'. As regards the submission about difference between a software service provider and a software product company, we agree, in principle, that a software product company cannot be compared with a simple software service provider. It has been noticed supra that the assessee is not only a software service provider bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies as comparables, got information directly from such companies u/s 133(6), which was not made available to the assessee. On that score, it was contended that such companies be declared as not comparable. This argument was countered by the ld. DR by putting forth that each and every document collected by the TPO from such companies was duly made available to the assessee. 12. We do not find any merit in this contention raised on behalf of the assessee. It can be seen from the order of the TPO that before including any company in the list of comparables, he gave a show cause notice to the assessee proposing it as comparable vide his office letters, inter alia, the one dated 26.8.2010 and also forwarded soft copies of the data so collected. It was then, that he called upon the assessee to explain its stand. The assessee made detailed submissions before the TPO against the comparability of such companies vide its letters dated 3/14.9.2010 running into more than 100 pages, copies of which are available in the paper book. Through these letters, the assessee objected to treating such companies as comparable giving specific reasons. It is self evident that the assessee could try to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... file of company 'A' vis-a-vis company 'C'. If both are functionally similar, then notwithstanding the fact that company 'A' was held to be incomparable to company 'B', it would still be comparable to company 'C'. Despite the fact that company 'A' is functionally similar to company 'B', it may still have been declared as incomparable to company 'B' because of failing some filter. If company 'A' passes the same filter vis-a-vis company 'C', then company 'A' will find its place in the list of comparables of company 'C', despite the fact that it was held to be incomparable to company 'B'. The crux of the matter is that the mere fact that company 'A' has been held to be not comparable in a judicial order passed in the case of company 'B', it cannot be said that company 'A' would automatically cease to be comparable to all the cases to follow. Not only company 'A' held to be incomparable to company 'B' can be comparable to company 'C', but company 'X' held to be comparable to company 'Y' can also be incomparable to company 'Z', depending upon the functional profile and the applicability or otherwise of the related filters. There can be no hard and fast rule that if a particular company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (Mum) [authored by the AM of this order] and Agilent Technologies International Pvt. Ltd. Vs. ACIT [(2013) 36 CCH 187 (Del) (Trib.)], is that a company having more than 25% of related party transactions is considered as controlled. In other words, if the related party transactions in a company are less than 25%, then, it cannot be considered as controlled and hence qualifies to be comparable, if it is otherwise so. 16.4. Since both the objections taken by the assessee against the inclusion of this company are not sustainable, we uphold the inclusion of the Software service segment of Accel Transmatic Limited in the list of comparables. The assessee fails. Avani Cimcon Technologies Limited: 17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to get complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such contention by relying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of reply from the company, it was noticed that it was engaged in software development services and, hence, qualified all the filters applied by the TPO. After considering the objections of the assessee, the TPO held it to be includible in the list of comparables. The DRP upheld the draft order on this count. 20.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be comparable to that of the assessee company, because it is also engaged in rendering software development services to outsiders. The ld. AR needlessly tried to distinguish this company by contending that the services rendered by it were different from that of the assessee. We do not find any force in this submission. The comparability of a company is tested on various parameters and a view is taken as to its comparability or otherwise by considering the entirety of the facts and circumstances. Simply because the nature of software development services provided by a company is different from those provided by the assessee, the same does not become incomparable. Here is a case in which this company is also providing software development services as is do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in selling its software products, such a company cannot be considered as comparable. It can be seen from the annual report of this company, a copy of which is available on page 88 of the paper book, that it consolidated its existing product portfolio and took steps to expand into further technologies by increasing the momentum in key initiatives in WIMAX, IMS, SIP & ISS/ESS domains. This company has its own products such as ASN, WIMAX, Gateway Product with ASN Light. It is further relevant to note that the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO has adopted the relevant figures for comparison. In view of the foregoing discussion, we hold this company to be not comparable and direct its exclusion from the list of comparables. The assessee succeeds. Geometric Limited (Segmental): 22. The assessee has no objection to the inclusion of this company in the list of comparables. Helios & Matheson Information Technology Limited: 23.1. The TPO noticed from the annual accounts of this company that it was engaged in the software development services and also qualified employee cost filter. The assessee objected to its inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that it qualified 25% employee cost filter and all other filters on the basis of information received u/s 133(6). The assessee objected to the inclusion of this company by contending that its related party transactions were more than 15% and employees cost was only 4%. The TPO rejected both the contentions by noticing that the employees cost was, in fact, more than 25% as was apparent from the information received u/s 133(6) and, further, the RPTs also did not exceed 25%. 26.2. Having heard both the sides and perused the relevant material on record, we find this company to be comparable to that of the assessee. The assessee's objection that employee cost of this company was 4% only, is not correct because of the exercise carried out by the TPO indicating that the employees cost was more than 25%. The ld. DR has taken us through the Annual accounts of this company which show that some part of the employees cost was also included in 'Administrative expenses' apart from direct Establishment expenses. It can be seen that the company has included Professional fees of Rs. 3.41 crore along with Director's salary, etc., under the head 'Administrative expenses'. When this objection was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has no objection to the inclusion of this company in the list of comparables. Lucid Software Limited: 29.1. The TPO noticed that this company was a pure software development services company and did not have any related party transactions. On being called upon to explain as to why this company be not treated as comparable, the assessee replied that Lucid Software Limited has developed `Muulam' software, the details of which were collected from the website of Lucid Software itself. In view of such details, it was contended that this company was a software product company having intellectual property rights. Rejecting the assessee's objections, the TPO included this company in the list of comparables. 29.2. After considering the rival submissions and perusing the relevant material on record, it can be seen that the assessee categorically objected before the TPO to the effect that this company was mainly into software product business having license of such products. The TPO ignored the assessee's submissions despite the fact that sufficient material taken from the website of this company was placed before him in support of the contention. It can be seen from page 192 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a subsidiary company was merged into this company pursuant to judgment of Hon'ble Bombay High Court w.e.f. 1.4.06. Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds. Quintegra Solutions Limiteda: 34. The assessee has no objection to the inclusion of this company in the list of comparables. R S Software (India) Limited: 35. The assessee has no objection to the inclusion of this company in the list of comparables. R Systems International Ltd. (Segmental): 36.1. The TPO included this company in the list of comparables and determined its OP/OC at 15.07%. The ld. AR has no objection to the inclusion of this company in the list of comparables. His only objection was confined to the calculation of OP/OC at 15.07%. He contended that the TPO erred in excluding the amount of `Provision for doubtful debts' from Operating costs. 36.2. We are not agreeable with the contention advanced on behalf of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty is quite distinct from that of the assessee. It can be seen that this company is into development of hardware and software for embedded products such as multi- media and some other electronics, etc. Apart from that, this company is also engaged in making some programmes developing technology intellectual property. As the nature of activity carried out by the assessee in question is nowhere close to that of Tata Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds. Thirdware Solutions Limited (Segmental): 40. The assessee has no objection to the inclusion of this company in the list of comparables. Wipro Limited (IT Services segment): 41. After considering the rival submissions and perusing the relevant material on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) has upheld the exclusion of this compan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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