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TMI Blog2017 (8) TMI 913X X X X Extracts X X X X X X X X Extracts X X X X ..... econd company. Thus, it is clearly deductible that if a particular company has been held to be not comparable in the case of another company, then such former company may not always be non-comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile and the relevant reasons of the other company. Ergo, this preliminary contention raised on behalf of the assessee is rejected as devoid of merits. Assessee business of ‘Software solutions’ and ‘Consultancy services’ in the area of telecommunication industry, thus industries functionally dissimilar with that of assessee need to be deselcted from final list of comparable. Addition towards Licence expenses - Held that:- The assessee agreed to share a percentage of sale price to Aircom, UK. Clause (1) of the Agreement provides that: “ITP charges to be paid by the subsidiary to the parent company @ 45% of the total sale value of software and support and maintenance charge.” Pursuant to this Agreement, the assessee raised invoices on certain customers in India. The invoice value was shown as its income and the amount paid to its AE was shown as Licence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted its own PLI at 9.81% as against that of comparables at 12.06% and claimed that the international transaction of Provision of software development services , transacted at ₹ 5,45,05,847/-, was at arm s length price (ALP). The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for determining the arm s length price of the international transactions. The TPO did not dispute the category-wise accounts drawn up by the assessee in the above referred three segments and went on to analyze the same. As regards the international transactions relating to Software Development Services , the TPO observed that the assessee developed some software to be used as input for the product ENTERPRISE suite sold/licensed by the Aircom Group worldwide. The assessee was being remunerated on cost plus 10% mark-up. As against the assessee s selection of 25 companies as comparable, the TPO, applying certain filters, restricted the number of comparable companies to 19. Their average OP/TC was computed at 26.21% which, after carrying out working capital adjustment, was revised to 27.98%. By applying this as arm s length margin, the TPO worked out the ALP of the Software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and configuration management. ENTERPRISE suite offers the advantage of seamless working management between disciplines throughout the organization and avoids the data transfer problems. The assessee develops software as per the requirements of Aircom, UK. Software developed by the assessee act as inputs for the ENTERPRISE suite of products which are sold/licensed by the Aircom group worldwide. As per the transfer pricing study report, the functions performed by the assessee include design of the software and its development. With the above general backdrop of the nature of activities carried out by the assessee under the Provisions of software development services segment, let us see the comparability or otherwise of the companies assailed before us. 6. At this juncture, we would like to deal with the preliminary objection taken up by the ld. DR. It was submitted that some of the companies now challenged were in fact chosen by the assessee itself as comparable. Having done so, it was contended that the assessee cannot now turn around and seek exclusion of these companies before the tribunal. 7. We are disinclined to sustain the preliminary objection taken by the ld. DR th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon ble Bombay High Court in Tata Power Solar Systems Ltd [TS-1007-HC-2016(BOM)-TP] and the Hon ble Punjab Haryana High Court in CIT VS. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P H) have also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR. 8. At this stage, it is also essential to deal with a submission advanced by the ld. AR, which is common to most of the companies under challenge, to the effect that certain Benches of the Tribunal in other cases have held them to be not comparable. In that view of the matter, it was urged that those companies, being ex facie incomparable, be excluded from the list of comparables drawn by the TPO. 9. We express our reservations in accepting such a broad proposition. It is axiomatic that if company A is functionally different from company B , then, such a company cannot be considered as comparable. Two companies can be treated as comparable when both are discharging overall similar functions, though there may be some minor differences in such functions, not marring the otherwise comparability. Notwithstanding the functional s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y may not always be non-comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile and the relevant reasons of the other company. Ergo, this preliminary contention raised on behalf of the assessee is rejected as devoid of merits. 10. We would also deal with another preliminary legal contention raised by the ld. AR. It was submitted that the TPO, during the course of proceedings before him, received information u/s 133(6) of the Act from various companies. Relying on such information, the TPO made certain inclusions/exclusions from the list of comparables which, in the opinion of the ld. AR, was not warranted. He stated that the TPO should not have collected information u/s 133(6) or used the same against the assessee in deciding the comparability or otherwise of the companies before him. This was strongly opposed by the ld. DR. 11. We are not convinced with the argument of the ld. AR for prohibiting the TPO from collecting any information u/s 133(6) for the purpose of determining the comparability and then using the same. Section 92(1) of the Act provides that any income arising from an interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ometimes it becomes essential to obtain the data for the year matching with the assessee. Similarly, there may be several other situations warranting collection of information from the companies u/s 133(6) of the Act. The information so collected can always be lawfully used for or against the assessee provided the assessee is confronted with such information and has been given opportunity of explaining its stand on the same. If the information so collected by the TPO u/s 133(6) of the Act has been confronted and the assessee given an opportunity to explain its position qua such information, there can be no fetter on the powers of the TPO to validly take cognizance of the same. The information for the relevant year, available as such in the public domain or so collected, is always more authentic than the information available on the website of the comparable company, which is normally taken during the course of proceedings before the TPO. Such information on the website is ordinarily germane to the date when it is taken, which is normally after a period of few years from the end of the relevant assessment year. In contrast to that, the information collected by the TPO u/s 133(6) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness systems. This technology focus has given us the opportunity to become proficient on a wide variety of industry leading tools as well as gaining experience with most database platforms. We are concentrating on Internet enabled business information systems in a wide range of industries. 14.3. The above extraction has been reproduced from page 83 of the TPO s order. This company clearly described its business activity as: providing software development and consulting IT services to its international clients. It is obvious from the reply tendered by this company that it is engaged in providing software development and also consulting IT services. In opposition, the assessee company is engaged in providing software development services alone and is not rendering consulting IT services. The effect of the revenue from consulting IT services in the overall financials of the company is not available. As this company is also providing consulting IT services, which is an essential ingredient of its revenues from Software development services , we cannot treat it as comparable with the assessee company, which is not providing any consulting IT services. The same is, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... network engineering including tools for radio planning, backhaul core planning and performance engineering and configuration management. It is not disputed that the ENTEPRISE suite is a very complex software solution. The software developed by the assessee, after designing, acts as an input for the ENTERPRISE suite which is sold/licensed by the Aircom group. Thus, it becomes palpable that the assessee is engaged in providing high end technical services, which are akin to the KPO services. The contention of the ld. AR that the assessee is involved in rendering BPO and not KPO services is clearly unsustainable for the nature of work carried out by it as discussed hereinabove. Coming to the Annual accounts of e-Zest Solutions Ltd., whose copy has been provided by the assessee from pages 1292 onwards of the paper book, it is found to be engaged in providing computer software development services. Reliance of the ld. AR on the decision dated 05.03.2015 of NXP Semiconductors India Pvt. Ltd. vs. DCIT [IT (TP) A No.1560/B lore/2012) is misconceived. It rather supports the case of the Revenue. The Bangalore Tribunal on page 29 of its order has held this company as not comparable vis- - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen we consider all the above factors in a holistic manner, there remains absolutely no doubt that Infosys Technologies Ltd. is not comparable with the assessee company. Respectfully following the judgment of the Hon ble jurisdictional High Court in Agnity India (supra) , we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables. (v) Kals Information Systems Ltd. (Seg.) 18.1. This company was offered by the assessee. However, during the course of the proceedings before the TPO, the assessee objected to its inclusion. The assessee submitted that it is primarily a software product company. For this proposition, the assessee relied on the website of the company. The TPO called for information u/s 133(6) of the Act from this company, which was replied as under:- Para 3 of your letter: The core of our business may be classified as that of Pure Software Development service Provider. In essence we get project (software development) orders from our clients drawn from various verticals such as Insurance, Telecom, Manufacturing, etc. We execute th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is. It is clear that the assessee is not providing any training under this segment, which has been rather included by the assessee in the second category of the assessee s business, namely, Software Deployment, Training, Consultancy and Equipment Rental. Since the assessee s activity under this segment does not include any revenue from training, but the revenue of Kals Information Systems Ltd., for the purpose of comparison includes income from training, this company ceases to be comparable with the assessee s segment of Software development services . Similar view has been taken by the Tribunal in the assessee s own case for the immediately preceding assessment years 2006-07 and 2007-08. Respectfully following the precedents, we hold that Kals Information Systems Ltd. (Seg.) should be expunged from the set of comparables. (vi) Persistent Systems Ltd. 19.1. The TPO observed this company to be engaged in software development services with predominant revenues from software development services. He called for some information u/s 133(6) of the Act from this company regarding break up of software products and software development services. On consideration of such inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utions Ltd. 20.1. The assessee initially treated this company as comparable in its TP documentation. The TPO obtained information from this company which transpired that it was into software development services. The assessee objected to the same by contending that it had certain peculiar economic circumstances. Not convinced with the assessee s submissions and considering the information obtained from this company u/s 133(6) of the Act, the TPO treated it as comparable. The assessee is aggrieved. 20.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it has Copyrights included in its Schedule of fixed assets with the closing written down value at ₹ 2.71 crore. This company has its own Software with the closing balance of ₹ 2.70 crore. Such software are also appearing in the Schedule of fixed assets of this company on standalone basis. This shows that this company is utilizing its software for rendering software development services. In contrast, the assessee in question is not having any software to be used in rendering software development services. It is, therefore, held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and services segment which, in turn, consists of three sub-segments, namely, Product design services (design and development of hardware and software), Innovation design and engineering (mechanical design with a focus on industrial design) and Visual Computing Labs (Animation and Visual Effects). Since this 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. The Tribunal in Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions India Pvt. Ltd. (supra) , both of which were rendering software development services, has treated this company as functionally not comparable. We, therefore, order for the exclusion of this company from the list of comparables. (x) Thirdware Solutions Ltd. 23.1. The TPO treated this company as comparable. The DRP refused to accept the assessee s contention for the removal of this company from the list of comparables. 23.2. We have perused the Annual report of this company which is available in the paper book. The Profit Loss Account of this company shows Sales Other in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Tribunal, in both the cases, has held Wipro Ltd. (Seg.) as not comparable. This company is operating as a full-fledged risk taking entity; engaged in providing technology infrastructure services, testing services, package implementation having more than 82,000 employees. It has its own R D centre. It incurred around 11% of net sales as expenditure on research and development. None of the above factors match with the assessee company. Respectfully following the above precedents, we hold that this company is not comparable. 24.3. There is another reason for holding this company as incomparable. It can be seen that there was a merger of Wipro Infrastructure Engineering Ltd., Wipro Healthcare IT Ltd., Quantech Global Services Ltd., with this company during the year in question. This merger was approved by the Hon ble Karnataka High Court and the Hon ble AP High Court during the financial year 2007-08. The Mumbai Bench of the Tribunal in Petro Arandite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176 has held that a company cannot be considered as comparable because of financial results distorted due to mergers and demergers, etc. Similar view has been taken by the Delhi Bench of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of functional dissimilarity because of such companies also engaged in software products, we hold that the TPO was right in not treating this company as comparable. (iii) Nihar Info Global Ltd. 28.1. The TPO excluded this company on the ground that it was also a product company. 28.2. We have gone through the Annual report of this company for the year under consideration. Page 2351 of the paper book clearly records under Schedule-M[3(i)] that: income from software products is recognized on the basis of the sale to the clients. Since this company is also engaged in the sale of products, we hold that this company was rightly not included in the list of comparables. The assessee fails on this count. ( iv) VMF Softtech Ltd. 29.1. The TPO did not consider this company as comparable because of its outsourcing the work to be rendered to its clients. This is evident from the Annual accounts of this company. The ld. AR was fair enough to concede this company as not comparable, which is also subcontracting the work. We, therefore, approve the view taken by the TPO in this regard. 30. The next issue raised in this appeal is against the transfer pricing adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to its AE as an intangible asset, the Assessing Officer allowed depreciation @ 25% and made addition for the remaining sum of ₹ 112.50 lac, against which the assessee has come up in appeal before us. 34. After considering the rival submissions and perusing the relevant material on record, it is noticed that Aircom, UK, offers solution for network engineering requirements with its software, namely, ENTERPRISE suite , which is a solution for all aspects of network engineering. Apart from directly licensing ENTERPRISE suite by Aircom, UK, the assessee also sells the software in the domestic market Since the intellectual property rights relating to ENTERPRISE suite vest in Aircom, UK, the assessee entered into contract with Aircom, UK to sell this Product directly in the domestic market. As a quid pro quo , the assessee agreed to share a percentage of sale price to Aircom, UK. Clause (1) of the Agreement provides that: ITP charges to be paid by the subsidiary to the parent company @ 45% of the total sale value of software and support and maintenance charge. Pursuant to this Agreement, the assessee raised invoices on certain customers in India. The invoice value was shown ..... X X X X Extracts X X X X X X X X Extracts X X X X
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