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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 ..... owever, 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. - IT(TP)A No.1324/Mum/2014 - - - Dated:- 31-1-2017 - SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER For The Appellant : Shri Ajit Tolani/Darpan Kirpalani For The Respondent : Shri N.K.Chand ORDER PER G.S.PANNU,A.M: The captioned appeal filed by the assessee pertaining to assessment year 2009-10 is directed against an order passed by DCIT, Cir.3(3), (in short the Assessing Officer ) passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( in short the Act) dated 09/01/2014, which is in conformity with the direction of the Dispute Resolution Pannel-1, Mumbai ( in short the DRP ) dated 27/12/2013. 2. In this appeal, assessee has raised the following Grounds of appeal:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transaction of provision of Global Call Center Services by the Assessee to AE on the basis of various presumptions and surmises: I. The learned AO / TPO has erred in law and on facts in rejecting following comparables selected by the Assessee for Global Call Center Services Segment on the basis of various presumptions and surmises: a) Allsec Technologies Ltd. b) R Systems International Ltd. c) Shreejal Info Hubs Ltd. II. The learned AO / TPO has erred in law and on facts in selecting following additional comparables for Global Call Center Services egment without carrying out a methodical and scientific search of comparables on the basis of various presumptions and surmises: a) Informed Technologies Ltd. b) Rev IT Systems Ltd. Ill. The learned AO / TPO has erred in law and on facts in adopting discriminatory selection of quantitative filters of export sales to total sales turnover percentage of 25% for Software Development Services Segment and export sales to total sales turnover percentage of 75% for Global call Centre Services Segment 4. Transfer Pricing General I. The learned AO / TPO has erred in law and on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer at ₹ 1,25,80,497/- has been added to the returned income. Against such a decision assessee is in appeal before us. 3.1 In so far as the first issue is concerned, the same relates to an adjustment of ₹ 1,03,43,472/- made to the international transaction of Provision of software development services by the assessee to its Associated Enterprises. In this segment assessee had rendered software development services to its Associated Enterprise for a stated consideration of ₹ 7,00,07,515/-. In this context, relevant facts are that assessee is a 100% subsidiary of Veraz Networks Ltd., USA (Now known as Dialogic Inc.). The assessee company has set-up unit for development of telecommunication software for its group entities and it also provides marketing and customer services and back-office support services (ITES) to its group entities. One of the segment is Provision of software development services to its Associated Enterprise based in Israel and USA. In consideration of the services provided, assessee receives compensation at cost + 12% and during the year under consideration it received a sum of ₹ 7,00,07,515/- for rendering of such services. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee has primarily argued for exclusion/inclusion of certain concerns, in the final set of comparables. Firstly, we may take up the plea of the assessee for exclusion of certain concerns from the list of comparables, as according to the appellant, the same are not comparable to the assessee. The first objection of the assessee is against the inclusion of Persistent Systems Solutions Ltd. in the final set of comparables. In this context, multiple arguments have been put-forth by the Ld. Representative for the assessee seeking exclusion of the said concern from the final set of comparables. Firstly, it is pointed out that the total sales of the said concern are to the tune of ₹ 527.06 crores for the year under consideration, whereas the assessee s turnover from the software development segment is only ₹ 7.00 crores and this vast difference signifies the differences in Functions performed, Assets used and the Risk assumed by the said concern vis-a-vis those undertaken by the assessee in its segment of software development services. Secondly, it is pointed out that the said concern is not a pure software development company but is also engaged in development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of things. So however, the other pleas of the assessee that the said concern is noncomparable due to difference in functions is quite potent. Ostensibly, the said concern is involved in not only rendering software development services, but also in sale of products, as is evident from the Annual Report placed in the Paper Book. More importantly, the Annual Report also shows very qualitative difference in the activities undertaken by the said concern. Notably, it is involved in creating research development centre in partnership with Indiana University USA, for development and research in life sciences, products lifecycle services, medical research, chemistry, bio-informatics, etc. It is also involved in developing specialized medical applications jointly with Washington University. It is also undertaking virtual observatory India project in collaboration with foreign institutions. Putting all these features together, it is quite evident that the said concern is incomparable with the activities of the assessee before us, which are purely rendering of software development services. Therefore, we uphold the plea of the assessee that the said concern is excludible from the final set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought out that operations of the said concern relates to providing information services, contact centre services delivered to customers globally with the work being performed onsite and offshore. Considering that the segment under test before us is providing of software development services, in our view, the activities of Igate Global Solutions Ltd. are in the field of ITE services and it is not comparable with that of the assessee. Thus, on this aspect also, assessee succeeds. 6. The next plea of the assessee is for exclusion of Bodhtree Consulting Ltd. from the final set of comparables. The exclusion of the said concern is sought on the ground that the said concern has earned an abnormal high margin of 64.89% and is, therefore, excludable from the final set of comparables. In support reliance has been placed on the following decisions:- (i) M/s. Mindteck (India) Ltd. vs. DCIT, I.T(TP)No.70/Bang/2014 (ii) Qlogic (India) Pvt. Ltd. vs. DCIT Pune, ITA No.227/PN/2014 (iii)Barclays Technology Centre vs. ACIT, Pune- ITA 2279/PN/2012 (iv)Softek India Pvt. Ltd. vs. ITO, ITA No.222/Bang/2014 7. The CIT-DR, on the other hand, pointed out that the Transfer Pricing Officer h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to first note that the Indian software industry uses two different models for revenue recognition. The first is the Time and Material (T M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model (FPP). Under the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below: 3. Revenue Recognition : Revenue from software development is recognised based on software developed and billed to clients. From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Project model. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year, for which the revenue may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly. Following the aforesaid precedent, which has been rendered under identical circumstances for the same assessment year, we direct that Bodhtree Consulting Ltd. be excluded from the final set of comparables. Thus, on this aspect also assessee succeeds. 9. The next plea of the assessee is for exclusion of Genesys International Corporation Ltd. from the final set of comparables. In this context, the sum and substances of the plea of the assessee is that the said concern is engaged in different activities and it is not comparable to assessee s activities of providing software development services. To substantiate, reference has been made to pages 65 to 73 of the Paper Book, wherein a copy of the extract from the Annual Report of the said concern has been placed. Apart there from, it has also been pointed out that the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally dissimilar to the activities being carried out by the assessee, inasmuch as, the said concern is engaged in diverse activities and that no segmental financial information is available in the Annual Report. By referring to pages 74 to 78 of the Paper Book, wherein is placed extracts of the Annual Report of the said concern, the Ld. Representative for the assessee pointed out that it is engaged in three strategic business units, namely, IT consulting 48%; E-learning solutions - 35%; and infrastructure management services 17%. It is pointed out that in the absence of any segmental data, the said concern s entity level margin is not comparable to the tested transaction, which is Provision of software development services. In this context, reliance has also been placed on the decision of the Pune bench of the Tribunal in the case of Barclays Technology Centre India Pvt. Ltd. in ITA No.2279/PN/2012 dated 28/1/2015. 10.1 On the other hand, the Ld. CIT-DR pointed out that since the said concern was also rendering software development services, the same has been included in the final set of comparables by the Transfer Pricing Officer. 10.2 We have carefully considered the riv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exports and, therefore, the said concern is includible. We deem it fit and proper to restore the matter to the file of Assessing Officer /Transfer Pricing Officer in order to verify the aforesaid position and, thereafter, consider the inclusion of the said concern in the final set of comparables. Needless to mention, the Assessing Officer /Transfer Pricing Officer shall allow the assessee a reasonable opportunity of being heard and, thereafter, decide on this aspect afresh, as per law. Thus, on this aspect assessee succeeds for statistical purposes. 11. The next plea of the assessee is for inclusion of CG- Vak Software Exports Ltd. in the final set of comparables, which according to the assessee has been wrongly excluded by the income-tax authorities. It is noticed that the Transfer Pricing Officer has excluded the said concern on the ground that the employee cost to the total operating revenues is less than 25%. The Ld. Representative for the assessee pointed out that in the case of CG- Vak Software Exports Ltd., the Transfer Pricing Officer has erred in applying the aforesaid filter. The sum and substances of the plea is that the employee cost filter does not fail in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own as an expenditure and in Schedule 15 to the Notes to Accounts, it ha been elaborated as follows:- Cost of services: Cost of Services Overseas 2,77,32,337 Cost of Services - Domestic 2,58,40,435 Transcription charges 3,97,389 Web Designing Charges 1,64,602 Staff Welfare 11,43,144 Staff Training 3,63,496 Contribution to PF ESI 15,47,906 Gratuity 13,04,894 Ex Gratia 0 HRD Expenses 3,10,871 5,88,05,074 (iii) It was submitted by the Id. counsel for the assessee that the TPO ignored the contribution to PF ESI, Gratuity and Ex Gratia payments and arrived at the employee cost. According to the Id. counsel for the assessee, doing so was not proper. If all the employee costs are properly considered, then, this company can pass the filter appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 restore the matter back to the file of Assessing Officer/Transfer Pricing Officer, who shall consider the plea of the assessee that the said concern is functionally similar as it is engaged in rendering software development services, as evidenced by the extract of its Annual Report placed before us in the Paper Book at page 10. 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. 13.1 Thus, in so far as, the first issue relating to the benchmarking of international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 concern that it collects and analyses data on financial fundamentals, Corporate governance, Executive compensation and capital markets and other services for research/advisory reports. In fact, the appellant has correctly asserted that its activities are not comparable to the Call Centre services being rendered by the assessee and, therefore, the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 cases with diminishing revenues. The TPO recorded that this company has some peculiar problems and hence the same is not in line with the growth in software industry. However, he did not delve into the actual figures of diminishing revenues of this company. As against this, it is observed that Allsec's operating revenue has increas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, we are of the opinion that in this case also, this company should be included as a comparable. We direct the Assessing Officer/TPO accordingly. 15.3 Following the aforesaid precedent, we direct the Assessing Officer/Transfer Pricing Officer to include the said concern in the final set of comparables. Thus, on this aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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