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TMI Blog2017 (1) TMI 1518X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing - Adjustment made on Software Development Services Segment The learned AO/TPO has erred in law and on facts in making transfer adjustment of Rs. 10,343,472 to the international transaction of provision of Software Development Services by the Assessee to AE on the basis of various presumptions and surmises: 1. The learned AO / TPO has erred in law and on facts in rejecting following . comparables selected by the Assessee for Software Development Services Segment on the basis of various presumptions and surmises: a) Birla Technologies Ltd. b) CG- Yak Software & Exports Ltd. c) Computech International Ltd. d) Goldstone Technologies Ltd . e) Sagarsoft (India) Ltd. ll. The learned AO/TPO has erred In law and on facts in selecting following additional comparables for Software Development Services Segment without carrying out a methodical and scientific search of comparables and on the basis of various presumptions and surmises: a) Persistent Systems & Solutions Ltd b) LGS Global Ltd. c) Sonata Software Ltd d) Igate Global Solutions Ltd. e) Bodhtree Consulting Ltd. f) Genesys International Corporation Ltd. g) FCS Software Solution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Expenditure. 1. The learned AO has erred in law and on facts in ad-hoc disallowance of ¼ of the expenditure of PSE unit." 3. Although the assessee has raised multiple Grounds of appeal, but the substantive dispute involve three issues, which we shall deal in seriatim. The appellant before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of research and development of telecommunication software and sales, marketing and customer support services. For the assessment year 2009-10, it filed a return of income declaring a total income at Rs. 44,97,156/-, which was subsequently revised to Rs. 46,21,652/-. In the ensuing assessment, it was noticed that assessee had undertaken international transactions within the meaning of section 92B of the Act with its Associated Enterprise (AE) and, therefore, reference was made to the Transfer Pricing Officer under section 92CA(1) of the Act for determination of their arm's length price. The Transfer Pricing Officer has passed an order under section. 92CA(3) of the Act dated 28/01/2013 holding that so far the international transactions relating to Provision of sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as per Indian Transfer Pricing Regulations. The Transfer Pricing Officer has not differed with the selection of TNMM or the PLI factor or the computation of assessee's margin. However, the Transfer Pricing Officer culled out the filters enumerated in para 5.2 of his order, and differed with the assessee on the selection of the comparable concerns. The Transfer Pricing Officer selected the following set of comparables whose average margin was determined at 23.23%:- S.No. Name of theCompany OP/TC% 1. Akshay Software Technologies Ltd. 12.48 2. Neilsoft Ltd. 8.47 3. Aztechsoft Software Tech 1.21 4. Indium Software Ltd -9.53 5. PSI Data System Ltd -3.06 6. Persistent Systems & Solutions Ltd. 30.86 7. LGS Global 21.35 8. Sonata Software Ltd. 29.51 9. Igate Global Solutions Ltd. 23.64 10. Bodhtree Consulting Ltd. 64.89 11. Genesys International Corp 58.47 12. FCS Software Solutions 40.5 Arithmatic Mean 23.23 Accordingly, the Transfer Pricing Officer has worked out an adjustment of Rs. 1,03,43,472/- to the stated value of the transactions, in order to determine its arm's length price. 3.2 With respect to the aforesaid, the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin of the said concern taken by the Transfer Pricing Officer at 30.86% is wrong, inasmuch as, while computing such margin the Transfer Pricing Officer has not considered the foreign exchange loss as a part of the operating costs and that if the said correction is undertaken, the margin of the said concern will reduce to 18.31%. 3.3 On the other hand, the Ld. Departmental Representative has not disputed the factual matrix asserted by the Ld. Representative for the assessee, but vehemently pointed out that the Transfer Pricing Officer has not applied any upper turnover filter and, therefore, it would be wrong to exclude the said concern by applying turnover filter because it would mean applying the turnover filter on a selective basis. 3.4 We have carefully considered the rival submissions. The strategy and the filters applied by the Transfer Pricing Officer have been elucidated in para 5.2 of his order, which does not entail application of any upper turnover filter. Therefore, we find merit in the argument of the Ld. CIT-DR that excluding Persistent Systems & Solutions Ltd. based on a filter, which has otherwise not been applied for the residual concerns would not be in the fitn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of the Tribunal in the case of M/s. Fiserv India Pvt. Ltd. (supra), the said concern is liable to be excluded from the final set of comparable. We hold so. 5. The next plea of the assessee is for exclusion of Igate Global Solutions Ltd. from the final set of comparables. On this aspect, the plea of the assessee is that the said concern is functionally dissimilar inasmuch as its activities are in the nature of ITE services, which is quite different from rendering of pure software development services. In support of such claim, the Ld. Representative for the assessee referred to the Annual Report of the said concern, copies of which has been placed in the Paper Book at pages 38 to 52. The stand of the Revenue, as emerging from the order of the Transfer Pricing Officer, is that the said concern is comparable because it is rendering software related services. 5.1 In our considered opinion, the assessee has to succeed on this aspect. We say so for the reason that as per the segmental reporting contained in the Annual Report of Igate Global Solutions Ltd., it is clearly brought out that it is operating " in one single segment with respect to product and services". It is also brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finally touched (-) 9% in FY 2012-13. Our attention was drawn to the fact that the Special Bench of the Tribunal, Mumbai, in the case of Maersk Global Centres (India) P. Ltd., in ITA.7466/Mum/2012, dt 07.03.2014 for AY 2008-09 had an occasion to consider the question as to whether companies having abnormal profits should be excluded as a comparable. The Special Bench took the view that it has to be shown that the high profit margin does not reflect the normal business conditions and only in such circumstances, high profit margin companies can be excluded. Our attention was drawn to the DRP's observation in its order on the issue which is as follows : " Bodhtree : The assessee has objected to selection of this entity on the basis of following objections: * The entity has fluctuating margins * The company is more of a product company rather than software service company. The Panel has considered the objections of the assessee. Insofar as the contention regarding the rejection of this entity on the basis of fluctuating margin is concerned, in order to appreciate the compatibility or otherwise of this entity, it is important to first note that the Indian software indu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern include urban planners, cartographers, remote sensing scientists, etc. The fact that the said concern is an IT enabled service provider is affirmed by the decision of the Hyderabad Bench of the Tribunal in the case of M/s. Capital IQ Information Systems Pvt. Ltd. (supra), which has been rendered for assessment year 2009-10, which is also the year before us. In the case of Symphony Marketing Solutions India Pvt. Ltd.(supra) also, the said concern has been evidently accepted as an ITES provider, which is quite distinct from the tested transaction of Provision of software development services in the instant case. Considering the aforesaid fact position, in our view, inclusion of Genesys International Corporation in final set of comparables for benchmarking assessee's segment of Provision of software development services is not tenable and is hereby set-aside. Thus, on this aspect also assessee succeeds. 10. The next point raised by the assessee is for the exclusion of FCS Software Solutions Ltd. from the final set of comparables. In this context, the plea of the assessee is that the said concern is functionally dissimilar to the activities being carried out by the assessee, inas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities while benchmarking the segment of software development services. On this aspect, the first plea of the assessee is with respect to the exclusion of Sagarsoft (I) Ltd. it is pointed out that the said concern has been excluded by the Transfer Pricing Officer on the ground that it does not comply with the export turnover filter. The Ld. Representative for the assessee pointed out with reference to the extracts from the Annual Report of the said concern that 90% of its operating revenues are by way of export earnings and, therefore, the said concern has been wrongly excluded by the Transfer Pricing Officer. 10.4 On the other hand, the Ld. CIT-DR points out that the said aspect may be verified by the Transfer Pricing Officer and a decision be taken afresh. 10.5 We have carefully considered the rival submissions and find that one of the filters applied by the Transfer Pricing Officer was to exclude concerns whose export earnings were less than 25% of the total operating revenues. In the context of Sagarsoft (India) Ltd., the plea of the assessee is that almost 90% of its operating revenue is from exports and, therefore, the said concern is includible. We deem it fit and proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14/08/2014) it has to be considered as functionally comparable to the assessee. Relevant para-27.8 of this Tribunal is re-produced hereunder; 27.8 CG-VAK Software & Exports Ltd. (D)(i) As far as this company is concerned, the TPO rejected the same by applying the 25% employee cost filter. According to the TPO, usually software development services are high-end services performed by skilled and professional employees and hence the cost of rendering such high-end services is also high as they comprise of high salaries and better welfare facilities, compared to low-end services. Therefore, the filter of employee cost of more than 25% of turnover was considered by the TPO while choosing the comparable. {ii) The submission of the Id. counsel for the assessee was that in the case of assessee, this test is satisfied. In this regard, our attention was drawn to page 818 to 824 of the assessee's paper book wherein annual report of this company has been provided. Attention was drawn to the fact that in the profit & loss account of the audited accounts, the cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Accounts, it ha§ been elaborated as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployee cost filter. On this aspect of the matter, we deem it fit and proper to restore the matter to the file of Assessing Officer/Transfer Pricing Officer for the purpose of culling out appropriate facts and to thereafter decide the matter afresh. Needless to mention, the Assessing Officer/Transfer Pricing Officer shall provide a reasonable opportunity of being heard to the assessee and, thereafter, decide on this aspect afresh, as per law. Thus, on this aspect assessee succeeds for statistical purposes. 13. The last point made by the assessee in the context of software development services is for the inclusion of Goldstone Technologies Ltd., which according to the assessee has been wrongly excluded by the Transfer Pricing Officer. The Ld. Representative for the assessee pointed out that the said concern is indeed engaged in providing software development services and it should be included in the final set of comparables. On this aspect, we find that the Transfer Pricing Officer has not given any reasoning to exclude the said concern from the list of comparables although its inclusion was sought by the assessee. Therefore, considering the arguments set up by the assessee, we rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transfer Pricing Officer worked out an adjustment of Rs. 22,37,025/- to the stated value of the transactions in order to compute its arm's length price. 14.1 With respect to the aforesaid, the first plea of the assessee is that the Transfer Pricing Officer has erred including the Informed Technologies Ltd. in the final set of comparables. According to the appellant, the said concern is functionally dissimilar as it is not providing any Call Centre services. At the time of hearing the Ld. Representative for the assessee referred to pages 84 to 94 of the Paper Book, wherein is placed an extract from the Annual Report of the said concern to point out the dissimilarity in functions performed. 14.2 The Ld. CIT-DR, on the other hand, pointed out that such a point was not raised by the assessee before the lower authorities, though the factual matrix brought out by the assessee is not disputed on the basis of material available on record. 14.3 We find that Informed Technologies Ltd. is operating as an IT enabled, knowledge based Back Office Processing Centre which serves the needs of the financial content sector in the USA. It is also emerging from the Annual Report of the said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 31/07/2014 for assessment year 2009-10 and the following discussion is relevant:- "(a) Allsec Technologies Limited:- 23. As far as this company is concerned, its comparable nature was analysed by the coordinate Bench of the Tribunal in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), in its order dated 6.6.2014. As seen from the TPO's order on comparables selected by the tax payer, this company is rejected as it fails export sales filter which was determined at 74.45% of its service revenue. On similar reason, the coordinate Bench in the above referred case has analysed and directed the TPO to include the said comparable, by stating as under- "9.1. This case was included by the assessee in the list of comparables which was excluded by the TPO on the ground of diminishing sales for the last three years and the export revenues less than 75% of the total turnover. Here, it is relevant to mention that the TPO adopted certain filters which have been mentioned on pages 13 and 14 of his order. One of such filters is the exclusion of companies whose export sales are less than 75% of the total sales from ITES. Another filter applied by the TPO is the exclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74.45%. If the actual ratio in this case had been more than 75%, and the Revenue hell bent on excluding this case, then it would have resorted to increasing the ceiling in the filter to 80% or still more so as to ensure that it remains outside the limit set by it. As the ratio of 75% is not something which is scientifically proven and the export revenue of Allsec Technologies is 74.45% as against the TPO's filter of 75%, we are of the considered opinion that the same cannot be excluded for such a minuscule difference if it is otherwise comparable. It is patent that the TPO has not disputed the otherwise functional comparability of this case with that of the assessee. If we consider the case of Allsec Technologies on a criteria of preponderance of comparability, we find that the same merits inclusion in the list of comparables. Not only the TPO's reasoning about the declining revenue of Allsec Technologies over a period of three years is incorrect, this case is also passing the test of the ratio of export turnover to total turnover on a pragmatic rational basis. We, therefore, hold that this case should be included in the list of comparables." For the reasons stated above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. 16.2 On the other hand, Ld. CIT-DR has reiterated the stand of the Assessing Officer, which we have already adverted to in the earlier paras and the same is not being levied for the sake of brevity. 16.3 Having considered the rival submissions, one thing that is clearly discernible is that the disallowance has been made on an adhoc basis without pointing out any particular item of expenditure which is relatable to the non- PSE division. It is also emerging from the record that the action of the Assessing Officer is based on similar addition made in assessment year 2008- 09. Before us, nothing has been brought out to show the finality of the addition made in preceding assessment year 2008-09. However, additions made on mere conjectures and surmises are unsustainable. Be that as it may, considering the entirety of circumstances, we deem it fit and proper to restore the matter back to the file of Assessing Officer, who shall reconsider the aforesaid addition afresh as per law, after allowing the assessee a reasonable opportunity of being heard in support of its stand. Thus, on this aspect assessee succeeds for statistical purposes. 17. In the result, appeal of the assessee is p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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