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TMI Blog2014 (12) TMI 893X X X X Extracts X X X X X X X X Extracts X X X X ..... Bang/2011 for AY 07-08 in M/s. Trilogy E-Business Software India Pvt.Ltd. Vs. DCIT, Circle 12(4), Bangalore and 3DPLM Software Solutions Ltd. Vs. DCIT IT(TP) A.No.1303/Bang/2012 order dated 28.11.2013. It was also submitted that the business profile of the Assessee and that of the Assessee in the case of M/S.Trilogy E-Business Software India Pvt.Ltd. (supra) and 3DPLM Software India Pvt.Ltd. (supra) are also identical and that the decision rendered in 3DPLM Software India Pvt. Ltd., (supra) is also in relation to AY 08-09. This submission was found to be correct at the time of hearing. With this background we will now consider the factual basis of the present case and the decision rendered in the case of Trilogy E-Business Software India Pvt.Ltd. (supra). 3. The assessee is a company. It renders software development and system integration services to Bearing Point Group and its worldwide customers. It is not in dispute before us that the transaction of providing software development services by the Assessee to its group companies was an international transaction with the Associated Enterprise "("AE") and therefore the price at which the assessee renders services to its AE has to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Level indicators is taken as the arms length margin. (Please see Annexure B For details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmetic mean PLI 25.14% Less : Working capital adjustment (Annexure-C) -1.70% Adj. arithmetic mean PLI 25.35% Arm's Length Price: Operating cost (Rs. 47,81,73,205 + reimbursement of expenses of Rs. 50,65,558) Rs. 48,32,38,763 Arm's length margin 25.35% of the operating cost Arm's length margin (ALP) at 123.36% of operating cost Rs. 60,57,39,789 Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arm's length price (ALP) at 123.36 per cent. of operating cost Rs. 60,57,39,789 Price charged in the international transactions Rs. 54,12,63,616 Shortfall being adjustment under section 92CA Rs. 6,44,76,173 The above shortfall of Rs. 6,44,76,173/- is treated as transfer pricing adjustment u/s 92CA in the Software Development and Maintenance services" 6. Against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 8....... 9. Celestial Biolabs Ltd. 9.1 to 9.3..... 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of coordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the coordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly." 9. Respectfully following the aforesaid decision of the Tribunal in the case of 3DPLM Software Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 Per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII- 04-ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the aforecited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The coordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 has excluded this company from the set of comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2011. As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the coordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand." 19. Respectfully following the aforesaid decision of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that the aforesaid company should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 20. It was next submitted by the learned counsel for the Assessee that the company at Sl.No.18 of the list of final comparable companies chosen by the TPO viz., M/S.Tata Elxsi Ltd., has to be excluded from the list of comparable companies on the ground that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the stand of the TPO in including this company in the list of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find 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. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) 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 devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons :- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M Software Solutions Ltd. (supra), we hold that the aforesaid companies should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 24. The next aspect highlighted by the learned counsel for the Assessee was the improper computation of working capital adjustment by the TPO which was confirmed by the DRP. In this regard the TPO computed the working capital adjustment of -1.70% as per annexure-C to the order of the TPO u/s.92CA of the Act. Before the DRP, the Assessee submitted as follows:- "5.12. Working capital adjustment The learned TPO provided for the working capital adjustment of -1.70 percent in the show cause notice issued. Pursuant to which, the assessee submitted as follows: 5.12.1. PLR adopted is erroneous The learned TPO proposed to adopt a PLR of 12.75 percent for the purpose of computation of the working capital adjustment. In this regard, the assessee stated that the rate of 12.75 percent adopted by the learned AO/TPO is not the PLR for the FY 2007- 08. The assessee provided its computation of working capital adjustment, in which it considered the Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in respect of the comparable that remain after excluding companies referred to in the earlier paragraphs. The same is given as Annexure-I to this order. 27. The learned counsel for the Assessee has also given a margin tabulation and computation of ALP after working capital adjustment which is given as Annexures II and III to this order. 28. After considering the submissions of the parties, we are of the view that it would be just and appropriate to direct the AO/TPO to consider the issue of working capital adjustment in the light of Annexure-1 to this order and submissions made before DRP. The TPO/AO will thereafter verify the charts given as Annexure-2 and 3 to this order to find out whether the claim of the Assessee is correct. The AO/TPO will afford opportunity of being heard to the Assessee before carrying out the aforesaid directions. Except the above submissions, no other submissions were made on Gr.No.1 to 15. Grounds No.1 to 15 are decided as set out in the earlier paragraphs. 29. In ground No. 16, the Assessee has projected its grievance with regard to the action of the learned Assessing Officer and Honorable Dispute Resolution Panel excluding a sum of Rs. 1,26,19,649 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided in the books in the earlier financial year, the same was debited to profit & loss account. The assessee submitted that the same has to be allowed as a deduction. 33. The AO, however, rejected the claim of the assessee by observing that the assessee follows mercantile system of accounting under which it was required to make provision for such contingencies in the relevant financial year itself. The assessee not having made the provision properly, cannot claim the same in the subsequent assessment year. The AO ultimately held that the expenditure debited does not relate to previous year and accordingly disallowed the claim of the assessee for deduction. 34. On objections being raised by the assessee to the draft assessment order of the AO in which he proposed to make the disallowance of prior period expenses before the DRP, the DRP confirmed the order of the AO. 35. Before us, the ld. counsel for the assessee submitted that the additional liability was recognized only during the previous year and the AO did not dispute the fact that these were genuine business expenses, therefore, the claim of the assessee ought to have been allowed. Reliance was placed on the following decis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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