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TMI Blog2018 (4) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... imited and Quintegra Solutions Limited in the arm s length price determination with regard to the facts and circumstances of the case? 2. The appellant- Steria India Ltd. is a subsidiary of Steria UK Corporate Ltd., which is an associated enterprise ( AE ) of the appellant under section 92A of the Act. The appellant is engaged in providing software and BPO services to its AE. 3. For the financial year 2009-10 (corresponding to assessment year 2010-11), the appellant reported international transaction of provision of software services. The appellant selected Transactional New Margin Method (TNMM) as the most appropriate method for benchmarking the international transaction under the software development services segment. 4. The Transfer Pricing Officer (TPO) passed an order on 17.01.2014, under Section 92 CA(3) of the Act, inter alia, recommending upward transfer pricing adjustment of ₹ 93,53,35,000 to the software development services segment of the appellant. The TPO rejected some comparables selected by the appellant and added fresh comparables, thereby selecting 16 final comparables for benchmarking the international transaction. 5. On 20.10.2015 the Dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. The filter is an appropriate filter. However, the same has not been correctly applied as the functions of comparables have not been correctly analyzed in the TP report as discussed later. v. Reject companies that have significant (less than 25%) foreign exchange earnings. The rationale for the filter is appropriate. However, since the assessee company is having 100% of its income from exports to its AEs, the limit of 25% is inadequate and the filter is required to be applied with the thresh hold of 75%. vi. Reject companies that have substantial (excess of 25%) related party transactions. This is an appropriate filter. vii. Reject companies incurring Persistent operating losses. This is an appropriate filter. However, only companies which are incurring losses persistently are to be rejected as against companies which have made loss once in a while. This is an appropriate filter because of the reason that software industry has been growing at a rate of more than 20% and in such an environment, a compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant incomes from manufacturing and trading activities are rejected. In your case your entire income is from provision of services and thus, the threshold for applying this filter has been taken at 75%. It would not be appropriate to benchmark your case against a company that has significant income from manufacturing or trading activities. This filter will thus ensure integrity of all comparable data. e) Reject companies where related party transactions exceed 25% of sales: There is no doubt that companies with significant related party transactions need to be excluded from the benchmarking process. On the issue of threshold of related party transactions, it can be stated that when the RPT exceeds 25% of sales, it can be said to be the stage when it will start affecting the price paid/received. The rationale given for the use of the limit of 25% is sound and this threshold limit has been approved explicitly an implicitly in quite a few judicial pronouncements. f) Companies that have employee cost that is less than 25% of total cost: The rationale for this filter is that companies that are engaged in providing services similar to yours will require a minimum level of expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt from STPI unit, Revenue from subscription Sale of Licence Software services. It was further discernible from the segment reporting, that the figures had, been given on the basis of Geographical segments, viz., India comprising of Products and other services and Overseas comprising of Software services. The TPO had taken only the Overseas segment for the purposes of inclusion in the list of comparables, which encompassed only export of software services. As the segment of the assessee under consideration was also only Software services, said segment of Thirdware Solutions - taken by the TPO fully matched and was held to be comparable. 11. This court is also of the view that said Company s operation comprised of software development, implementation and support services. Primary segmental reporting is based on geographical areas. Said company s earning are to a significant extent export oriented. Separate books of account were maintained for the reported segments and wherever costs are directly identifiable with the reported segment, Revenue in the overseas segment came from export of software services, which are comparable to the assessee company. It is discernible from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any also included income from IT. enabled services and there was no segmental information qua the software services alone, it could not be treated as a comparable. 14. This court finds that the TPO found that said company did not qualify the employee cost filter. It was making persistent losses in software services segment. Apart from earning income from Software services, said company also earned income from Business process outsourcing services , which fell in the realm of I.T. enabled services. TPO found that there was no segmental information qua the software services alone. Consequently, exclusion of CG Vak Software Exports Ltd. was in order and cannot be interfered with. 15. Coming to the third company in issue i.e. Quintegra Solutions Ltd. TPO held that the said company was an abnormal company as on one hand, sales were declining, receivables and write-offs were also increasing. Further, the debtors of earlier years were affecting the working capital adjusted OP/TC of the company significantly. It was held that in a normal situation, there would be some debtors pertaining to earlier years, but they would be limited and would be counter balanced by creditors. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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