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TMI Blog2017 (12) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) with reference to the transactions reported by the assessee in its Form No. 3CEB. The assessee has adopted Transactional Net Margin Method (TNMM). It has taken the operating profit to operating cost (OP/TC) as the 'Profit Level Indicator' (PLI). The assessee is the tested party. It identified nine companies as comparables. CIL is one among them. During the course of transfer pricing proceedings, the TPO requested the assessee to submit the updated OP/TC for comparable companies using data for the financial year 2011-12 only. The assessee submitted the same before the TPO vide its letter dated 22.12.2015. The arithmetic mean of the PLI of such comparable companies comes to 15.95%. We produce below summary of the operating margin of the comparables submitted by the assessee before the TPO: Sr. No. Company name Operating Margin (OP/TC) 1. Akshay Software Technologies Ltd. 9.87% 2. CG VAK Software & Exports Ltd. 16.18% 3. Cybermate Infotek Ltd. 56.97% 4. Firstobject Technologies Ltd. 0.93% 5. Goldstone Technologies Ltd. 11.01% 6. R S Software (India) Ltd. 15.21% 7. R Systems Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Development, product development and IT services. (p. 211 of P/B); however, the assessee is low-end software developer and it not comparable to CIL, (ii) further, the company has developed over 39 products, including HEALSOFT, a Hospital Management Software; the Annual Report also lists down 12 other products (p. 215 of the P/B), (iii) further, the company reports "Intangible Assets under Development" and also capitalizes "Web Development Expenses" in its Balance Sheet; this proves that the company has intangibles, while the assessee does not own any intangible assets. (p. 231, 238 of the P/B), (iv) further, the percentage of employees cost to total operating cost CIL is only 11.10% however, the assessee's corresponding percentage of employee cost is 48%; this implies that CIL is not a service oriented company, while the assessee is one, (v) though CIL is a company selected by it in its TP Study Report, the said company should be excluded since it is not comparable to it; there is no estoppel on the assessee to request for the exclusion of a company which was selected by it. 4.2 The Ld. counsel relies on the decision in CIT v. PTC Software (I) (P.) Ltd. [2016] 75 taxmann.com 31 (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -end routine, software development and localisation services to LB Group. LB Group companies undertake the project with overseas customers and part of the project (software development/localisation) are outsourced by LB Group to LB India. This has been stated at para 1.2.1 of the 'Transfer Pricing Study Report' filed by the assessee. (p.24 of (P/B). We also find that CIL is engaged in the business of providing Custom Built Software development, product development and IT services to customers in domestic and overseas locations (p. 211 of the P/B). 6.1 Against the above background of the operations of the assessee and CIL, we discuss the decisions relied on by the Ld. counsel. While discussing we keep in mind the following observation of the Hon'ble Supreme Court in Padmausundara Rao v. State of T.N. 255 ITR 147(SC): "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns rendered by the assessee and CIL fall broadly in similar domain. 6.2 We now turn to 'Revenue recognition', which is a 'Lighthouse' having a powerful flashing light to show us where to go. It means when the revenue should be recognised in the profit and loss account and also states the circumstances in which revenue recognition can be postponed. Generally speaking, Revenue means gross inflow of cash, receivable and other considerations arising in the course of ordinary activities of an enterprise such as (i) the sale of goods, (ii) rendering the services, (iii) use of the enterprise resources by others yielding interest, dividend and royalties. Against the above back drop, we mention below the 'Revenue recognition' which is a part of 'Significant Accounting Policies' followed by the assessee and CIL. 6.2.1 Revenue recognition of the assessee has been mentioned in 'Note-15' (p.10 of the P/B), which reads as under: "The Company derives its Revenues primarily from rendering Software development, Localisation and other related services. Income from services is recognised based on the contractual arrangement with the customer in the period in which such services are rendered." ..... X X X X Extracts X X X X X X X X Extracts X X X X
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