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TMI Blog2018 (1) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... LP) of the IT. s for the year under consideration. After receiving the order of the TPO the AO issued a draft order proposing upward adjustment as suggested by the TPO. Aggrieved by the draft order, the assessee filed objections before the Disputed Resolution Panel(DRP)-1, Mumbai. Vide its order dated 26. 12. 2014, the DRP rejected all the objections raised by the assessee. Accordingly, the AO made an adjustment of Rs. 4, 81, 37, 790/-to the total income of the assessee. 3. During the Transfer Pricing(TP)proceedings, the AO found that the assessee was a global provider of customised scalable enterprise in e-business solutions, that it operated through development-centers located at Mumbai, Pune, Bangalore etc., that it was the national implementa -tion partner for SAP in India rendering software services/software development customisation and trading in software/hardware, that it is a subsidiary of Bristlecone India Ltd. (BIL)of Cayman Islands, that the ultimate holding company was Mahindra and Mahindra Limited, that it had provided software services to its associated enterprises that it has charged an aggregate amount of Rs. 40. 51 crores, the cost of sales was shown at Rs. 37. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration and suggested an upward adjustment of Rs. 4. 81 crores. 5. Aggrieved by the draft-order of the AO the assessee filed objections before the DRP, the assessee made detailed submissions about various comparables and relied upon certain case laws. After considering order of the TPO/AO, submissions of the assessee and the documents placed before it, the DRP held that the services rendered by the assessee could be broadly divided into five parts namely integrated-supply-chain, integrated-sourcing and procurement, informa tion-management, managed-services and technology and integration, that for any comparability analysis the comparable should largely similar to the assessee, that the TPO had applied different filters, that the march year end filter was perfectly in order, that assessee had objected to the above filter, that it had not elaborated the objections, that it had not given the names of comparable having March year end to the TPO or the DRP. 6. Before us, the Authorised Representative(AR)argued that the TPO had applied ad-hoc filters for rejecting the comparables selected by the assessee without any valid basis, that he cherry picked comparables and had not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y. 09-10);Equant solutions Private Ltd. (ITA/1202/Del/ 2015 AY. 10-11);Telecordia Technologies India Pvt. Limited(137 ITD 1);Sunlife India Services Centre (P. ) Ltd., (ITA/750/2015/Del;AY. 10-11);Lionbridge Technologies Pvt. Ltd. (ITA/1303/Bang/2012, -AY. 08-09), Parexcel International(India)P. Ltd. (ITA/1918/Hyd/2014, AY. 10-11-dated, 8/1/2016) ; TIBCO Software(India)Pvt. Ltd. (ITA/94/PN/2014, A. Y. 09-10-dtd. 10/4/15);Actis Global services Pvt. Ltd. (ITA/6175/Del/2015, AY. 11-12dated29/7/2016);Pegasystems Worldwide India Pvt. Ltd. (ITA/1758/Hyd/2014;1936/Hyd/2014;AY. 10-11dtd. 16/10/2015);M/s. Lionbridge Technologies Pvt. Ltd. (ITA/668/Mum/2014-AY. 09-10, dated 18/11/2015);and M/s. Broadcom India Research Pvt. Ltd. (ITA/348/Bang/2015 A. Y. 2010-11, dated 13/07/2016). 6.1. The Departmental Representative(DR) argued that the assessee company itself was involved in Software product development in addition to software development services. He referred to pages 241-243, 260-261, 364-368 and 427-436 of the paper book in his support. It was further argued that if the 8 comparables were to be removed, based on the objections of the assessee, then four other comparables namely RS Softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of International SOS Services India P. Ltd. (ITA/1631/Del/ 2014, AY. 2009-10-dated 8/12/2015);All -scripts India Pvt. Ltd. (ITA 2401/Ahd. /2013 A. Y. 08-09 dated 28/ 6/2013)and Panasonic AVC Networks India Co. Ltd. (ITA 4620/Del/2011 A. Y. 04-05 dated 21/2/ 2014). 7. We have heard the rival submissions and perused the material before us. We find that the assessee had adopted TNMM for determining the ALP of the IT. s., that it had selected 12 compa -rables, that the TPO rejected some of the comparables selected by it, that he selected 10 comparables, that the DRP rejected one of the comparable introduced by the TPO, that it endorsed the exclusion of the comparables made by the TPO, that following the directions of the DRP, the AO made an upward adjustment of Rs. 4. 81 crores. 7.1. Before proceeding further, we would like to refer to the matter of Vodafone India(368 ITR 1). In that matter the Hon'ble jurisdictional high court has discussed the background of introduce -tion of section 92 of the Act and the procedure to be followed in TP matters in following words: "The arm's length price is meant to determine the real value of the transaction entered into between associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alid comparable, considering the fact that it was engaged in engaged in the business of software products. Therefore, we hold that it is not a valid comparable for determining ALP of the IT. s entered in to by the assessee. 7.3. We would like to deliberate upon the remaining three comparables, selected by the assessee namely, QSL, RSIL and LGL. Before us, the AR had contended that the financials of the three comparables revealed that assertions made by the DR were factually incorrect. The DR had relied upon the annual reports of these comparables and referred to the section titled segment wise or product wise performance under management discussion and analysis. We find that phrase in question i. e. 'segment wise or product wise performance' finds place in the annual report because of the circular issued by the SEBI of 21. 02. 2000. SEBI had constituted a committee to promote and raise the standard of corporate governance in respect of listed companies. After considering the recommendation of the said committee SEBI advised the corporate entities to incorporate a new clause(clause 49)in listing agreement. We are reproducing the relevant portion of the circular and it reads as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure on R&D : (a)Capital (b) Recurring (c ) Total (d ) Total R&D expenditure as a percentage of total turnover After going throuugh the above, we hold that form B is the right source to find out about incurring of expenditure under the head R & D. Reference of R & D activities in the Annual report, in our opinion, is not a decisive factor. Annual Report or the report of the Directors highlights the general things. Details of various activities carried out by the assessee and expenses incurred by it in that AY. are available in the schedules of the financials and as well as in the forms prescribed by the Rules. The DR has not referred to both these vital documents. We find that R & D expenses do not appear in the financials/disclosures of the three comparables. In the case of QSS it has been specifically mentioned in the financials that 'no expenditure was incurred on R&D in current year'(Anenex. 2 to the Director's report). In the case of net Hawk networks India P Ltd. (supra)the Tribunal has held that QSS was engaged in the business of software development services. Considering the above, we hold that for the year under consideration they i. e. all the three ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generic name of product or service has been shown as Software services and Pg. 11 does not prove that LGL was in to software production business. On Pg. 14 of the Annual Report the assessee describes itself as an innovative technology service provider and on the same page it has been mentioned that it offers services and solutions to diverse enterprise companies. On page 16 there is no mention of software product development. As per the Accounting policies followed by the assessee(Pg. 47)it was earning income only from software services and not from software products. We would again emphasise that presence of intangible assets in financial statements in itself is an good indicator but is not a reliable proof to draw an acceptable and positive conclusion. Financials of the assessee, for the AY. under consideration, show income from software services only. So, we hold that in spite of the facts that intangible assets are appearing in the balance sheet, it cannot be held that the assessee was in engaged in the business of software products. Both the activities are totally different. In the cases relied upon by the assessee, LGL has been accepted a valid comparable for companies provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es company. In the case of L&T it is found that it was engaged in development of software products and providing related services(Pg. 114-115). Presence of significant intangibles/IPRs/Brand building (Pg. 115-117)lead to the conclusion both cannot be compared. In this case segmental information is also not available. In short, L & T is a giant company that assumed all risks leading to higher profits, so it is not comparable with a limited risk company i. e. the assessee. As per Pg. 126, PSI was engaged in development of software-products and was providing related services. It was also involved in brand building and was offering diversified range of Services. In the case of SCTL, it is found that as per the financial statements it has significant presence of intangible assets in the form of technical knowhow, contractual rights and non-compete fee (Pg. 34-135). It is an IP driven producer company (Pg. 501-502). We hold that SCTL a company owning intangibles cannot be compared to a low risk service provider i. e. the assessee. SSL, one of the comparables is engaged in development of software products and providing related services. Financials of the company prove presence of IPR. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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