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TMI Blog2016 (3) TMI 1256X X X X Extracts X X X X X X X X Extracts X X X X ..... set that if his grounds relating to selection of comparables appearing in para 4.a, 4.b and 4.f, along with additional grounds are considered the other grounds relating to transfer pricing issues would be taken as not pressed. In view of the submissions of the Ld. AR we are confining ourselves to grounds 4.a, 4.b and 4.f, which assails application of filters by the AO and applying 25% criteria for RPTs while selecting the comparables. 3. Facts apropos are that assessee is a wholly owned subsidiary of Novell Inc., USA (Novell US). Novel US, helps customers realise the value of their information and deliver it securely and economically to their stake holders across any platform. Assessee provided software development and support services to Novel, US Inc. Financial results of the assessee for the relevant previous year read as under : Operating income 495420000 Gross Operating Cast as per P&L A/C 448990000 Less: Adjustments Exchange Loss 1361000 Net Operating cost 447629000 447629000 Op. front 47791000 Operating Profit to Op. Cost %age 10.68% 4. Its international transactions with the AEs as per the audit report in Form 3CEB were reported as under (a) Software Develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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% 2.68/2.39% 12.77 11.40% 22 Sasken Communication Technologies Ltd. (Seg.) 343.57 22.16% 0 3.94 1.15% 23 SIP Technologies & Exports Ltd 3.80 13.90% 0 0 0.00% 24 Tata Elssi 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 (Seg.) 9616.09 33.65% 0 58.26 0.61% 25.14% 7. Common comparables appearing in both the list of assessee as well as that of the TPO were as under : 1. Geometric Software Solutions Co. Ltd. 2. Helios & Matheson Information Technology Ltd. 3. Infosys Technologies Ltd. 4. KALS Information Systems Ltd. 5. Lanco Global Systems Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned companies. As for Geometric Ltd (seg), Ld. AR submitted that RPT of the said company exceeded 15% and by virtue of coordinate bench decision in the case of 24/7 customer.com Pvt Ltd v. DCIT [(2013) 140 ITD 344] had to be excluded. Vis a vis Quintegra Solutions Ltd, Ld. AR submitted that comparability of the said company in software development services was an issue which had come up before this Tribunal in the case of NXP Semiconductors India P. Ltd, [IT(TP)A.1174/Bang/2011, dt.14.11.2014]. As per the Ld. AR, it was held in the said decision that Quintegra Solutions Ltd, could not be considered as a proper comparable in the said segment. 11. Continuing his arguments, Ld. AR submitted that Megasoft Ltd, though it could be considered as a good comparable, segmentation of its results was necessary in line with the decision of this Tribunal in the case of Triology E- Business Software India P Ltd, v. DCIT [(2013) 140 ITD 540]. Reliance was also placed on the decision of coordinate bench in the case of Meritor LVS India (P) Ltd, (supra). 12. Per contra Ld. DR submitted that certain benches of this Tribunal have held that 25% as threshold limit for RPT transactions, even after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of NXP Semi conductors India P. Ltd v. ACIT [IT(TP)A.1174/Bang/2011, dt.14.11.2014]. 15. Vis-a-vis comparability of Accel Transmatics Ltd (seg), this Tribunal has held as under at para 8 of its order : 8) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom 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, howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred." An amount of ₹ 11,692,020/- has been debited to the Profit and Loss Account as "Deferred Revenue Expenditure" (page 30 of PB II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R&D activities is bad in law. 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45.From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been 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 segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Now taking up the question of exclusion of Flextronics Software Systems Ltd (seg), it is true that the decision of Motorola Solutions (India) P. Ltd (supra) also was for the very same year and also on software development services sector. This Tribunal held as under : "97.2 For a company to be included in the list of comparables, it is necessary that credible information is available about the company. Unless this basic requirement is fulfilled, the company cannot be taken as a comparable. It is true that ld. TPO is entitled to obtain information us/ 133(6), the object of which is primarily only to supplement the information already available on record, but not, as rightly submitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in ITA No. 5637/D/2011 149 agreement with ld. counsel for the assessee that this company cannot be included as a comparable in the set of comparables selected by ld. TPO on account of clear contradiction between contents of ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its ITservices segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. The argument put forth by assessee'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." 22. Vis-a-vis Ishir Infotech Ltd, and Lucid Software Ltd, findings of the Tribunal which appear at para 5 and 6 of the order (supra) is reproduced below : 5) & 6) 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid companies from the final list of comparable companies for the purpose of determining ALP." 23. In respect of Kals Information Systems Ltd, findings of the Tribunal as appearing in para 4 of the order (supra) is reproduced hereunder : 4) KALS Information Systems Ltd. "46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue 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 regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y qualifies onsite revenue filter (onsite revenues were to the extent 27.27% of its export revenues). After considering the assessee's reply, ld. TPO included this company in the list of comparables. Ld. counsel pointed out that this company has incurred significant expenditure on research and development activity the same being 6.07% of sales. He further submitted that the company had significant intangible inasmuch as it develops siskin branded products. The company owns IPR Further it was pointed out before TPO that during the year the company had acquired Botnia Hightech F. and its two subsidiaries and thus, it had under gone significant restructuring. However, ld. TPO ignored these facts He relied on the following decisions: • IQ Information System (I) Pvt. Ltd., ITA No. 1961/Hyd./2012 (para no. 11 & 23, page 25); • Amerson Process Management India Pvt. Ltd., ITA No. 8118/Mum./2010 (para 16 page 15). 110. Ld. DR relied on the order of TPO and submitted that TPO considered the companies software services segment details only. We have considered the rival submissions and have perused the record of the case. 111. Ld. TPO has completely ignored the extraordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the 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." 28. In respect of Wipro Ltd (seg), observations of the Tribunal found in para 7 of the order is reproduced hereunder : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the coordinate 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 company from the set of comparable companies in the case on hand for the year under consideration." 29. No doubt Ld. DR has taken a pleading that Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Kals Information Systems Ltd (seg), Sasken Communication Technologies Ltd (seg), Tata Elxsi Ltd (seg) and Wipro Ltd (seg), were a part of the TP study of the assessee and hence it could not seek exclusion. However, we find that though these companies appeared in the TP study of the assessee it had raised objections against their inclusion before the TPO. Objections taken by the assessee for Helios & Matheson Information Technology Ltd, is appearing at para 13.15 of TP order. However, TPO had overruled such objections. Similar was the case in Infosys Technologies Ltd, and the comments of the TPO appear at 13.18 of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we remit the question of exclusion of Geometric Ltd, back to the file of the AO / TPO for consideration afresh. 32. Vis-a-vis Megasoft Ltd, we find that this Tribunal in the case of Meritor LVS India (P) Ltd, had held as under at para 13 of its order : Megasoft Ltd. : 24. This company was chosen as a comparable by the TPO. The objection of the assessee is that there are two segments in this company viz., (i) software development segment, and (ii) software product segment. The Assessee is a pure software services provider and not a software product developer. According to the Assessee there is no break up of revenue between software products and software services business on a standalone basis of this comparable. The TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software. This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customiz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,211 Operating Profit Rs.11,96,19,333 OP/TC (PLI) 23.11% 26. It was reiterated that in the given circumstances only PLI of software service segment viz., 23.11% ought to have been selected for comparison. 27. It was further submitted that the learned TPO in case of other comparable, similarly placed, had adopted the margins of only the software service segment for comparability purposes. Consistent with such stand, it was submitted that the margins of the software segment only should be adopted in the case of Megasoft also, in contrast to the entity level margins. 28. Computation of the net margin for Mega Soft Ltd. Is therefore remitted to the file of the TPO to compute the correct margin by following the direction of the Tribunal in the case of Trilogy EBusiness Software India Pvt.Ltd." 23. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to compute the correct margin of Mega Soft Ltd., as directed by the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. (supra). Accordingly we hold that Megasoft Ltd can be considered as a good comparable after segmentation as directed in the above order is done. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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