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TMI Blog2015 (5) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... mcon Technologies Ltd., Celestial Biolabs Ltd.,KALS Information Systems Ltd., Infosys Technologies Ltd., Wipro Ltd., Tata Elxsi Ltd.,Thirdware Solutions Ltd.,. Lucid Software Ltd.] as not functionally comparable with a software development service provider such as the Assessee - Decided in favour of assessee. - IT(TP)A No.1186/Bang/2012 - - - Dated:- 10-4-2015 - Shri N.V. Vasudevan And Shri Jason P. Boaz JJ. For the Appellant : Shri Chavali S.Narayan, C.A. For the Respondent : Shri C.H. Sundar Rao CIT-((DR) ORDER Per N.V. Vasudevan, Judicial Member This appeal by the assessee is against the order dated 31.7.2012 of the ITO, Ward 11(2), Bangalore passed u/s. 143(3) r.w.s. 144C of the Act, in relation to A.Y.2008-09. 2. Ground No.1 is general in nature and calling for no specific adjudication. Grounds No.2 to 4 raised by the Assessee project the grievance of the Assessee regarding the action of the learned Assessing Officer and Honorable Dispute Resolution Panel excluding expenses incurred on travel expenses in foreign currency and expenses incurred towards telecommunication expenses from export turnover on the ground that these expenses are incurred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Solutions Ltd. (supra) are also identical. 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 M/S.3DLPM (supra). 5. The assessee is a company. It is a wholly owned subsidiary of M/S.Face Time USA. It rendered software development research and development services to its holding company. It was remunerated on a cost plus 10% mark up for services rendered to its holding company. It is not in dispute before us that the transaction of providing software research development support services by the Assessee to its holding company was an international transaction with the Associated Enterprise (AE) and therefore the price at which the assessee renders services to its AE has to pass the Arm s Length Price (ALP) test as laid down by section 92C of the Act. During the financial year 2008-09, the assessee provided software research development support services to its AE and was remunerated on a cost plus basis. The total value of international transaction with respect to the provision of software research development support services by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 ucid Software Ltd. 16.50 AVERAGE 23.65 8. The assessee raised various objections to the methodology adopted and the reasons assigned by the TPO for rejecting the comparables chosen by the assessee in its TP study. In the course of proceedings before the TPO, notice u/s. 133(6) has been issued to the companies that were chosen as comparable by the assessee as well as the TPO and on the basis of the replies received in response to such notices, certain inferences were drawn by the TPO. The action of the TPO in relying on some of those information was also challenged by the assessee. The TPO finally passed an order u/s. 92CA of the Act and on the basis of the comparables set out as aforementioned, arrived at arithmetic mean of 23.65%. After factoring the working capital adjustment of 0.39%, the adjusted arithmetic mean was determined at 23.26%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and the FAR analysis of Trilogy case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Trilogy case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Trilogy E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Trilogy E-Business Software India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the TPO / DRP for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1 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 to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der for Assessment Year 2007- 08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that - .. As explained earlier, it is a diversified company and therefore cannot be considered as comparable functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dissimilar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by coordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Trilogy E-Business Software India Pvt. Ltd. in ITA No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. Virtual Insure and La-Vision and b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To 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 culled out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither 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 leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant 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) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely - a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telecordia Technologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore this company cannot be considered as a comparable to the assessee in the case on hand. (iii) Tata Elxsi Ltd. is predominantly engaged in product designing services and is not purely a software development service provider. In the Annual Report of this company the description of the segment software devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 14. The learned DR relied on the orders of the Revenue authorities. In our view the issue is squarely covered in favour of the Assessee by the aforesaid decision of the Tribunal. Respectfully following the aforesaid decision, we direct the AO to exclude Celestial Biolabs Ltd., Kals Information Systems Ltd., Infosys Technologies Ltd., Wipro Ltd., and TATA Elxsi Ltd., from the list of comparable companies for arriving at the Arithmetic mean of comparable companies profit margin while determining ALP. 15. The learned counsel for the Assessee next point out that Thirdware Solutions Ltd., Lucid Software Ltd., chosen as comparable companies by the TPO should be excluded as functionally not comparable with a company engaged in software development services such as the Assessee, as laid down by the Hon ble ITAT, Bangalore Bench in the case of 3DPLM Software Solutions Ltd. (supra), wherein it was held as follows:- 15. Thirdware S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 16. Lucid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. Ltd. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 16. The learned DR relied on the orders of the Revenue authorities. In our view the issue is squarely covered in favour of the Assessee by the aforesaid decision of the Tribunal. Respectfully following the aforesaid decision, we direct the AO to exclude Thirdware Solutions Ltd., and Lucid Software Ltd., from the list of comparable companies for arriving at the Arithmetic mean of comparable companies profit margin while determining ALP. 17. The learned counsel for the Assessee submitted before us that if the aforesaid 8 comparable companies are excluded from the list of 20 comparable companies chosen by the TPO, then the profit margin of the Assessee would be well within the (+) (-) 5% range of the arithmetic mean of the remaining comparable companies and therefore the price received by the Assessee would be considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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