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TMI Blog2015 (2) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... development services, this company cannot be considered as comparable. We, therefore, order to eliminate this company from the list of comparables. Celestial Labs Ltd. - it is manifest from the Annual report of this company that the same cannot be considered as comparable on entity level when it has dealt not only with software products, but has also engaged itself into software development and also rendering services. In comparison with that, the assessee company is simply providing software nondevelopment services to its AEs. Flextronics Software Systems Ltd. (Seg.) - it is a software products company and is also providing software development services, even the segmental results of software development services cannot be equated with the activities undertaken by the assessee for its AEs. We, therefore, order to exclude this company from the list of comparables. Helios & Matheson Information Technology Ltd. - as find from the Annual accounts of this company it is engaged into similar business activity as is done by the assessee. After going through some pages of the Annual report, giving details about the nature of business activity done by this company, the ld. AR also c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As there have been acquisitions by Megasoft Ltd., during the year in question and the financial results of the erstwhile company stand included in the overall profitability of this company, respectfully following the precedents, we hold that this company cannot be considered as a comparable. Persistent Systems - The acquisition took place in this company during the relevant to the assessment year under consideration. Following the reasons given above while discussing the case of Megasoft Ltd., we order for the exclusion of this company from the list of comparables. Sasken Communication Technologies Ltd.- we find that the financial results of this company stand distorted due to certain acquisitions made by it during the relevant year. It also transpires from this Annual report that the companies getting merged with the assessee company also provided software services focused on telecom operating systems. Thus, it is abundantly patent that the segmental results taken by the TPO of this company have been influenced by the mergers and acquisitions taken place during the year, thereby making such financial results as incomparable. Following the reason given above, we order for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer (AO) u/s 143(3) of the Income-tax Act, 1961 (hereinafter also called `the Act ) on 31.10.2011 in relation to the assessment year 2007-08. 2. Briefly stated, the facts of the case are that the assessee is a joint venture between MH, USA and the Tata Group of India. Its activities encompass publishing original books and selling McGraw Hill products in India. The company publishes books for schools, colleges and professional markets. The assessee s publishing activity comprises sourcing authors and developing books to suit readers in various disciplines. The assessee is also providing back office support services in the nature of IT enabled services, transaction processing and data processing services to its associated enterprises (AEs). The assessee reported certain international transactions in Form No.3CEB. In the present appeal, we are concerned only with the international transaction of rendering IT support services to McGraw Hill Education (Asia), Singapore with a value of ₹ 4,07,64,433/-. The assessee s gross revenue from the `Publishing segment amounted to ₹ 108.94 crore with operating profit of ₹ 18.75 crore. In the `Back office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide administrative and other similar services for the Business Units as included in Schedule A in TMH s Territory. Such services shall include, but not be limited to, general accounting services, accounts payable services, payroll processing services, any other administrative and accounting services and all other assistance as requested by MHCI (herein referred to as the Services ). As a compensation for the above services, the AEs agreed to reimburse all the expenses directly or indirectly incurred by the assessee in the performance of the services with 10% mark-up. The assessee, vide its letter dated 13.09.2010 addressed to the TPO, narrated the nature of services rendered by it to the AEs, the relevant part of which is as under:- Back office support services provided by TMH India are in the nature of routine IT administration and support and software support type of services related to data and transactions. A perusal of the Agreement between the assessee and its AEs divulges that the assessee rendered general accounting services, accounts payable services, payroll processing services, any other administrative and accounting services to its AEs. The TPO has designated s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product company. It is manifest that there is a phenomenal difference between a company providing software development services and a company providing software non-development services in terms of expertise, professional qualification and experience required for rendering such services. A company providing software non-development services performs a relatively low-end service. From the above, it is amply clear that whereas a company providing software development services helps in the creation of a software, on the other hand, a company providing nondevelopment software services obtains the desired services with the use of a software. Further, whereas the output of the former is a software in itself or a stage in the ultimate creation of a software, the output of the later is the processed information from the raw data obtained with the help, inter alia, of a software. The later company does not create or develop any software but simply uses an already existing software. From the above discussion, it is overt that as a software product company cannot be compared with a company providing software development services, similarly, a company providing software development services is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer supply systems. A bare perusal of the nature of activities done by this company under this segment divulges that it is into software development services and also the sale of software products. On the other hand, the assessee in question is involved into rendering software non-development services, which are far away different from software development services. We, therefore, order for the exclusion of this company from the list of comparables. (ii) Avani Cimcon Technologies Ltd. 8.1. The TPO included this company in the final set of comparables by observing that: As per the information available in the public domain, it is a software development and consulting company. After seeking information from this company u/s 133(6) of the Act, the TPO found it to be qualifying all the filters. That is how this company was held to be comparable. The assessee is aggrieved against the inclusion of this company in the final set of comparables. 8.2. After considering the rival submissions and perusing the relevant material on record, it can be noticed from the TPO s observations that this company is into software development. From the Annual report of this company, a copy of whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that it is a software products company as well as a service provider. 10.2. After considering the rival submissions and perusing the relevant material on record, it can be seen from the Annual report of this company that it is an end-to-end provider of communication products, services and solutions to network equipment providers, handset manufacturers, service providers and business process outsourcing sectors. From the Notes to the financial statements of this company, it can be observed that: The activities of the company include development of package software, providing software consulting services and other ancillary products and services, primarily for use in the telecommunications industry. In view of the fact that it is a software products company and is also providing software development services, even the segmental results of software development services cannot be equated with the activities undertaken by the assessee for its AEs. We, therefore, order to exclude this company from the list of comparables. (v) Helios Matheson Information Technology Ltd. 11.1. The TPO included this company in the final set of comparables by noticing that it was engaged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable. 13.2. After considering the rival submissions and perusing the relevant material on record, we find that the entire premise of the TPO s inclusion of this company in the list of comparables is that the software products constitute only 3% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: the use of readymade object laboratories is only to the tune of about (0.33 to 3) % in the year 2005-06 and 2006-07. We fail to comprehend as to how the above line conveys that the software products revenue stands at 3%. What has been written is that the company s use the readymade object laboratories is only to the tune of maximum 3%. By no imagination this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software product s revenue limited to 3%. On the contrary, it has been mentioned in the Notes to the financial statement that: the company is engaged in development of software and software products since its inception. The company consisting of STPI unit engaged software produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received with relevant mark-up. When we consider the assessee s balance sheet, which is available in the paper book, it turns out that the assessee has also shown a particular amount under the head Software in its Schedule of fixed assets, and, thereafter, it also claimed deduction on account of amortization during the year, leaving the balance unamortized amount under the head Software. It shows that the assessee is also using its software for rendering the services in the similar manner as is done by Lucid Software Ltd. Apart from that, the ld. AR could not point out any functional difference with Lucid Software Ltd. We, therefore, approve the inclusion of this company in the list of comparables. (ix) Megasoft Ltd. (Seg.) 15.1. The TPO included this company in the list of comparables. The ld. AR argued for its removal on the basis of certain acquisitions done by this company during the year. 15.2. After considering the rival submissions and perusing the relevant material on record, we find from the Notes to Accounts in the Annual report of this company that there was, in fact, amalgamation of Visualsoft Technologies Ltd. Note no. 25 with the caption Amalgamation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant year. It is evident from the Annual report of this company, which is available on page 868 and 924 of the paper book. It has been categorically mentioned in its Annual report that during the year this company acquired Botnia Hitech Oy, Finland and its two wholly owned subsidiaries. It has also been stated in the same para that during the year the company also successfully completed three mergers, namely, Sasken Network Systems Ltd., and Integrated Softtech Solutions Pvt. Ltd., the two Indian based wholly owned subsidiaries which merged with the assessee. It also transpires from this Annual report that the companies getting merged with the assessee company also provided software services focused on telecom operating systems. Thus, it is abundantly patent that the segmental results taken by the TPO of this company have been influenced by the mergers and acquisitions taken place during the year, thereby making such financial results as incomparable. Following the reason given above, we order for the exclusion of this company from the list of comparables. (xii) Tata Elxsi Ltd. (Seg.) 18.1. The TPO included this company in the list of comparables notwithstanding the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue argued by the ld. AR is about not approving the use of multiple year data of comparables. The assessee adopted multiple year data of comparable companies, which the TPO modified only to the current year s data. Rule 10B(4) provides that : `The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into . Nothing has been placed on record by the ld. AR to demonstrate that the case falls under proviso to rule 10B(4), which provides that the data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. In view of a plethora of decisions including the Special Bench decision in the case of Aztech Software Technologies Ltd. (2007) 107 ITD 141 (Bang.) (SB), we approve the view taken by the authorities below in considering only the current year s data. This ground is not allowed. 22. Another issue raised by the assessee is against the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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