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TMI Blog2015 (6) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... sale/licence of software products on the overall profitability of the ‘Application software’ segment cannot be segregated. To what extent the overall profits of this company have been influenced by the revenues from software products, cannot be precisely ascertained. In view of the aforegoing distinguishing facts, this company ceases to be comparable. Persistent Systems Ltd. has been held to be functionally different from a software development service provider company. See FCG Software Services (India) (P) Ltd. Vs. ITO [2014 (12) TMI 681 - ITAT BANGALORE] Tata Elxsi (Seg.) company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable with the assessee company, which is simply providing software related services. Wipro Ltd. (Seg.)A company which does not own any IPRS and carries on the activity of rendering software development services at its own cannot be compared with a company which provides software development services by using its own IPRS in the form of patents of software. Under such circumstances, we hold that this company cannot be considered as comparable at segment level. The same is ex consequenti directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee remained partly successful before the Dispute Resolution Panel (DRP), which reduced the amount of addition on account of transfer pricing adjustment to ₹ 12,82,48,777/- as against ₹ 18.95 crore proposed by the TPO. The AO made addition of ₹ 12.82 crore and odd in the final assessment order passed on 19.10.2012. The assessee is aggrieved against this addition made towards transfer pricing adjustment. 4. We have heard the rival submissions and perused the relevant material on record. The assessee has accepted all the aspects of the transfer pricing analysis carried out by the TPO except the inclusion of the following companies in the list of comparables:- i. Avani Cincom Technologies ii. Infosys Ltd. iii. Kals Information Systems Ltd. (Seg.) iv. Persistent Systems Ltd. v. Tata Elxsi (Seg.) vi. Wipro Ltd (Seg.) 5. In order to analyse the comparability or otherwise of the above referred companies, it is necessary to consider the functional profile of the assessee under this international transaction. The TPO has recorded on page 2 of his order that the assessee `is engaged in the provision of software development services to its o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity control procedures at par with the industry. This department is inter alia involved in process improvisations, making of new processes, quality audits, customer surveys, etc. Project Management GIPL is responsible for ensuring timely delivery of the software developed by it under the contract. However, Global Logic Inc is ultimately responsible to deliver the software to the client. Administrative Support With respect to personnel rendering onsite and off shore services, GIPL is responsible for provisions of administrative support which includes functions such as arranging work permits/visas, foreign exchange, payment of allowances, etc. 6. An overview of the above activities carried out by the assessee divulges that it is mainly responsible for the development of software under the projects sub-contracted to it by GlobalLogic Inc. Such developed software are to be tested by the assessee. The Testing department of the assessee, apart from testing the software developed by it, also undertakes process improvisations, making of new processes, quality audits. After developing and testing a software, the assessee is required to ensure that such developed software are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above six companies are comparable. Before that, it is pertinent to mention that for the immediately preceding assessment year, namely, 2007-08, the TPO chose certain companies as comparable for the similar international transaction of `Provision of software development services . The appeal filed by the assessee for such year in ITA No.580/Del/2011 has since been disposed of by the tribunal vide its order dated 22.1.2015, a copy of which is available on record. It can be noticed from such Tribunal order that the TPO treated similar international transaction, as has also been transacted for the instant year, as `Provision of software development services . Such services have been provided to the AEs, both in the preceding year as well as the current year, in terms of the common Agreement effective from 1.4.2006. The crux of the matter is that the nature of services rendered by the assessee in the current year under the extant international transaction are similar to those rendered in the preceding year. Avani Cincom Technologies 9. The TPO included this company in the list of comparables by noticing that as per the information available in the public domain, it is a software dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it failed functional area comparability. The TPO found this company to be into software development services qualifying all the filters applied by him. The assessee raised certain objections against the inclusion of this company, but without any success. The TPO computed operating profit margin of this company at 40.41% and included it in the final list of comparables. The assessee is aggrieved against the inclusion of this company in the ultimate set of comparables. 12. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee s contention about the brand of this company helping in earning huge profits and also the brand-related products swelling the ultimate profit rate of this company. We find that the assessee is a captive unit rendering services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 357 of the paper book also states that : The company derives its revenues primarily from software services and software products. Since this company is into the business of software products and also software development and has merged the revenue from both the streams under the overall segment of Application software , which has been taken by the TPO for inclusion in the final set of comparables, this company loses the tag of comparability vis-a-vis the assessee company which is exclusively engaged in providing software development services on a contract basis to its AEs as a captive unit. It is manifest that under the circumstances prevailing in the case of this company, the impact of the profit from the sale/licence of software products on the overall profitability of the Application software segment cannot be segregated. To what extent the overall profits of this company have been influenced by the revenues from software products, cannot be precisely ascertained. In view of the aforegoing distinguishing facts, this company ceases to be comparable. We order for the exclusion of this company from the list of comparables. Persistent Systems Ltd. 15. This company was or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd. Vs. ITO (ITA No.1242/Bang./2012) vide its order, a copy of which is available on record. Again, in LG Soft India (P) Ltd. Vs. DCIT (2014) 48 taxmann.com 237 (Bangalore-Trib.) this company has been held to be functionally different from a software development service provider company. In view of the above discussion and relying on so many precedents favouring the elimination of this company, we are of the considered opinion that Persistent Systems Ltd., cannot be considered as comparable with the assessee company. The same is, therefore, directed to be excluded. Tata Elxsi (Seg.) 17. This company was rejected by the assessee in its TP documents by claiming it to be `functionally different . The TPO observed from the Annual report of this company that it has two segments, namely, Software development and services segment and Systems integration and support segment. Noticing the segmental details, the TPO considered `Software development and service segment as comparable. The assessee s objections against the incomparability were set aside. The assessee remained unsuccessful before the DRP as well. 18. After considering the rival submissions and perusing the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carries on the activity of rendering software development services at its own cannot be compared with a company which provides software development services by using its own IPRS in the form of patents of software. Under such circumstances, we hold that this company cannot be considered as comparable at segment level. The same is ex consequenti directed to expelled from the set of comparables. 21. The ld. AR submitted that if the above six companies are removed from the final list of comparables, then, there will remain no scope for any addition on account of TP adjustment and there will be no need to assail other points. We find that all the above companies have been excluded by the Tribunal in the assessee s own case for the immediately preceding year, in Toluna India Pvt. Ltd. (supra) and/or Motorola Solutions India Pvt. Ltd.(supra). Under such circumstances, we set aside the impugned order and send the matter back to the AO/TPO for a fresh computation of ALP of the international transaction undertaken by the assessee in conformity with our above decision. Needless to say, the assessee will be afforded a reasonable opportunity of being heard in such fresh adjudication. 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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