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TMI Blog2016 (3) TMI 1242X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds relating to TP issues are dismissed as not pressed. 04. Facts apropos are that assessee engaged in R & D services in the field of e-commerce, e-solutions, internet security and management, filed its return of income for the impugned assessment year declaring income of Rs. 54,94,29,613/-. Since value of the international transactions undertaken by the assessee during the relevant previous year exceeded the stipulated limit, reference was made to the TPO for analysing the ALP of such transactions with its AE. Assessee is a part of HP group and its ultimate holding company is Hewlett Packard Company, USA. It had operating revenue of Rs. 628,74,04,881/- against operating cost of Rs. 580,40,71,166/- resulting in a profit of Rs. 48,33,33,715/-, with a ratio of 8.33% as operating profit to operating cost. International transactions undertaken by the assessee during the relevant previous year as reported in its audit report were as under : International Transactions (as mentioned in the 92 CE report) Software Development Services Rs. 585,47,55,957/- Purchase of fixed assets Rs. 34,79,50,015/- Purchase of components Rs. 4,37,66,553/- 05. Recommendations of the TPO wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems Ltd (Seg) 2.00 30.55% 106/3% 0 0.00% 13 LGS Global Ltd (Lanco Global Solutions Ltd) 45.39 15.75% 0 1.22 2.69% 14 Lucid Software Ltd 1.70 19.37% 0 0 0.00% 15 Mediasoft Solutions Ltd 1.85 3.66% 0 0 0.00% 16 Megasoft Ltd 139.33 60.23% 26.47/19% 10.21 7.33% 17 Mindtree Ltd 590.35 16.90% 0 0 0.00% 18 Persistent. Systems Ltd 293.75 24.52% 2.16/0.73% 28.55 9.72% 19 Quintegra Solutions Ltd 62.72 12.56% 0 0 0.00% 20 R S Software (India) Ltd 101.04 13.47% 0 0.85 0.84% 21 R Systems International Ltd (Seg.) 112.01 15.07% 2.68/239% 12.77 11.40% 22 Sasken Communication Technologies Ltd (See.) 343.57 22.16% 0 3.94 1.15% 23 SIP Technologies & Exports Ltd 3.80 13.90% 0 0 0.00% 24 Tata Elxsi Ltd (Seg.) 262.58 26.51% 0 3.34 1.27% 25 Thirdware Solutions Ltd 36.08 25.12% 0 3.60 9.90% 26 Wipro Ltd (Set.) 9616.09 33.65% 0 58.26 0.61% 25.14% 06. On the average ALP of 25.14% as worked out above, TPO allowed negative working capital adjustment of 2.16%. Final ALP of the comparables considered by the TPO was 22.98%. He therefore recommended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally different vide para 24 of the order mentioned supra. 09. Continuing his submissions, Ld. AR asserted that comparability of Megasoft Ltd, was also considered by this Tribunal in the above decision and the Tribunal had remitted this issue back to the AO / TPO for proper segmentation of its results. Further according to him, M/s. Flextronics Software Systems Ltd (seg) also had to be excluded by virtue of the finding appearing at para 28 of the decision in the case of Hewlett Packard Global Soft P. Ltd (supra). 10. Per contra, Ld. DR submitted that assessee could not show how it was functionally similar to the software development segment of Hewlett Packard Globalsoft P. Ltd (supra). 11. We have perused the orders and heard the rival contentions. Out of the 26 comparables selected by the TPO, assessee is seeking exclusion of twelve companies and is also pleading for segmentation of result of one company before comparing. As per the assessee these companies were functionally different and it was so held by this Tribunal in the case of Hewlett Packard Global Soft P. Ltd (supra). What we find is that M/s. Hewlett Packard Global Soft P. Ltd (supra) also fell in the same group of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 232 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: "The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bioinformatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." vi) Infosys Technologies Ltd. 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's is that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. vii) & viii) M/S.Ishir Infotech Ltd. And Lucid Software Ltd : 20. As far as comparable companies listed at Sl.No.11 & 14 of the final list of comparable companies chosen by the TPO viz., M/S.Ishir Infotech Ltd. And Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supra) are one and the same. This fact would be clear from the fact that the very same 26 companies were chosen as comparable in the case of the Assessee as well as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07- 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 company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : " Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company ............... have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks." (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 14.2 Before us, it was reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and (c) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 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 pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving licenses for use of software. In this 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 afore cited 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (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 such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally different and not comparable to it, para 28 of the order of the Tribunal in the case of M/s. Hewlett Packard Global Soft P. Ltd (supra), is reproduced hereunder : 28. In the case of Flextronics Software Systems Ltd (seg), no doubt the annual report was for the year ending 31.03.2007. However it was only for a nine months period. No reconciliation was attempted by the lower authorities between the figures given in such annual report with the figures which were made available by the said company to the TPO pursuant to notice issued to them u/s.133(6) of the Act. No doubt at page 123 of TP order, TPO has stated that the software development service revenues were more than 75% based on the following figures : Particulars 2007 (Rs. million) % 2006 (Rs. million) % Services-related parties 198 2.3 72 1.17 Services - other 7.368 85,51 4.851 78.72 Products-related parties 10 0.12 10 0.17 Products - others 896 10.1 970 15.74 BPO 129 1.5 214 3.17 Goods and others 15 0.17 45 0.71 Total Sales 8,616 106 6,165 100 But how this segmentation was done by the TPO and the reconciliation of the said segmentation with the annual report of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and Wipro Ltd (seg), from the list of comparables. Comparability of M/s. Tata Elxsi Ltd (seg), is remitted back to the TPO / AO for consideration afresh as per law. We also direct that Megasoft Ltd, shall be considered for inclusion only after segmentation of its results. Needless to say working capital adjustment shall be reworked by the AO / TPO confining to the comparables that are left after exclusions. Concise grounds 2.4, 2.6 and 2.7 are treated as partly allowed. 15. Ld. AR did not press ground 3. Hence it is dismissed as not pressed. 16. Vide grounds 4 and 5, assessee states that foreign currency expenditure on telecommunication expenditure ought not be excluded from the export turnover and in the alternative it should be reduced from total turnover also while computing the relief u/s.10A of the Act. 17. We find that submission of the assessee that what has been reduced from export turnover should also be deducted from the total turnover while working out the deduction u/s.10A of the Act, needs to be accepted in view of the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd (349 ITR 98). Accordingly, grounds 4 and 5 are treated as partly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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