9911796707
TMI Blog2018 (10) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... operating expenses to be bifurcated amongst all the sources of the revenues of the assessee from operations including the instant international transaction. X X X X Extracts X X X X X X X X Extracts X X X X ..... services were rendered only for certain functions or modules within a product and not for the whole product, which activity, in turn, was done by MS Corporation in US. The assessee still further stated that there were a couple of minor products, like BizTalk and Data Protection Manager (DPM), for which it provided significantly more Product engineering and design work services. In performing such Product engineering services, the assessee claimed that it did not deal with any other aspect of product development, such as, market research nor did it make any decision regarding which products were to be developed. It was explained that the ultimate holding company, namely, MS Corporation, USA, generates revenue by developing, manufacturing and supporting a wide range of software products and services for different types of computing devices and in order to make such products, the assessee and other MS affiliates perform R&D activity in a very limited way around the world under the overall guidance of MS Corporation, USA. The assessee explained the Software product life cycle comprising of three phases, namely, Product Definition, Product Engineering and Servicing. Under the Product De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the TPO proposed transfer pricing adjustment of ₹ 201,21,96,582/-. The assessee assailed the correctness of the draft order passed by the A.O., incorporating the TPO's view point, before the Dispute Resolution Panel (DRP) which directed to recompute the profit margin of the comparables. On giving effect to the directions of the DRP, the TPO proposed fresh transfer pricing adjustment of ₹ 197,23,68,765/- in the international transaction of provision of Software development services, for which the addition came to be made in the final assessment order. The assessee is aggrieved by the addition. 6. We have heard both the sides and perused the relevant material on record. The assessee employed the TNMM as the most appropriate method with the PLI of OP/OC for benchmarking the international transaction of rendering software development services. Unlike some earlier years, the TPO did not dispute the application of the TNMM as the most appropriate method, nor did he dispute the PLI. The assessee has primarily challenged the inclusion of all the companies and also the exclusion of some of its selected companies by the TPO in/from the final list of comparables. 7. Comparabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t key series for MS Corp products; Global Sales Experience (GSX) - CRM application for MS Corp Sales and marketing efforts; Headcount - Applications for maintaining headcount details for Full Time Employees (FTEs) and vendor resources; EAS - Enhancement - Portfolio of applications for enhancements on SAP customization for Microsoft (MS Corp) Business requirements; VL FY11 Volume Licensing software (VLSC) - Licensing application for MS Corp product sales. Thereafter, the TPO has noted in para 2.4 on page 45 of his order that the TP study acknowledged that the assessee participated in the product definition process for subsequent versions of minor products like BizTalk for which the initial product definition was produced by MS Corp. (page 13 of TP study report); the assessee is responsible for design, implementation and verification of code for minor products like BizTalk and DPM (Data Protection Manager) (page 14 of the TP study report); Product definition is performed outside India with the exception of some incubation projects targeting emerging markets (page 15 of the TP study report); the assessee is creating ten inch language tools which are available for free for download fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e working closely with other engineering leaders in Redmond, USA. For the work assigned to the assessee, he stated to be writing the functional specifications documents. Next is the interview of Shri Amit Chatterjee with designation of Managing Director and General Manager - Developer Tools and Windows Azure. In response to question no. 1, he stated to be involved, along with his team, in two feature areas in engineering organization, the first one, being, the Visual Studio Product line of Microsoft which is a part of Developer Division at Microsoft and the second, being, Azure product line. Azure is a distributed operating system for the Microsoft Cloud offering, similar to the dedicated operating system for Windows desktop. Next is the interview of Shri Anil Bhansali with designation of General Manager, Windows Server and System Centre, IDC, Hyderabad. He, along with his team, stated to be involved in WinSE Charter, Windows Engineering Group Server. In response to question no. 2 about the work flow in respect of each area of its activity, he stated that the same would be submitted later. There is nothing on record to substantiate that anything was submitted later. In response to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l date, the consequences of these statements in the overall scenario, are yet not available by way of any order by the APA as to whether these were accepted or any further investigation was carried out which either corroborated the same or transpired anything else. 11. When we consider the version given in the interviews by these people that they were not at all involved in conceptualization, we find the same to be running contrary to the submissions made by the assessee before the TPO, which have been captured on page 42 of his order by means of a table in which the assessee has categorically admitted that it is involved in conceptualization and scoping of project work including defining functions specifications though in a very limited way. Despite specific requisition made by the TPO to give data as to how its role was limited or very limited in product conceptualization, the assessee did not submit any material/evidence. A finding to this effect has been recorded on page 44 of TPO's order. Again, it has been recorded on page 45 of the order that though the assessee claimed in Parent-Subsidiary Agreement (PSA) dated 01.07.2003 that it undertook the activity of research and deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO has repeatedly noted that though the assessee admitted in its Transfer pricing study report to be involved in development of software etc., : 'but it does not give any data as to how it is construed that the role in product conceptualization is limited or very limited'. Similar is the position regarding the other functions, such as, Project execution and Coding, testing and documentation, in which, again, the assessee admitted to have a limited role to play, but did not spell out such role before the TPO. 14. The assessee also acknowledged in its TP Study report, as has been extracted in para 2.8 on page 46 of the TPO's order, that it is involved in the development of various products and 'is responsible for design implementation and verification of some products like BIZTALK and DPM'; is 'also involved in product definition phase of some incubation project, like development of various indic language translators'; and is 'also involved in the creation of window vista'. Despite the above averments in the Transfer Pricing Study Report, the assessee not only took a contrary stand before the TPO by trivializing its role as restricted only to coding and testing of some features o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of a chart, as has been discussed above. 16. Admittedly, the assessee did not carry out the entire work of the MS Products at its own. Out of the work assigned, it sub-contracted some of the work to the Indian parties, for which it made a payment of ₹ 158 crore during the year. Such payment is divided into two parts, viz., ₹ 126.75 crore towards Application & Development and ₹ 31.70 crore towards Product Development. The ld. AR was directed to produce contracts entered into with all the third parties for which such a sum of ₹ 158 crore was paid so as to judge the overall nature of the work done by the assessee. Out of 12 contracts under 'Application & Development', the assessee has filed copy of Agreements only with one party, that is, Accenture Services Private Limited. Out of 33 contracts under 'Product Development', the assessee has filed copies with three parties only. Thus our attempt to find out the overall nature of work done by the assessee with the aid of subcontractors has also not fructified. 17. The ld. AR tried to justify his stand of not sharing the primary evidence by stating that the examination of such an evidence was not warranted as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that: 'In consideration of Subsidiary's research and development activities under Article 2 of the Agreement, MSFT shall pay Subsidiary a fee equal to one hundred and fifteen percent (115%) of Subsidiary's actual expenses…'. 20. Clause 5 of the PSA, which is central for our purpose, states that the intellectual property in respect of research work done by the assessee shall vest in Microsoft, USA, relevant parts of which read as under : - 5. INTELLECTUAL PROPERTY MATTERS 5.1 Research and Development. Subsidiary agrees that any and all developments made by it or under Subsidiary's direction, in connection with the performing of research and development work for MSFT shall be owned by MSFT in their entirety. Such developments shall (to the extent possible) be deemed "works made for hire" created by Subsidiary for MSFT pursuant to 17 USC Section 102(b). All copyrights (to the extent (if at all) not already owned by MSFT as "works made for hire), patents and other proprietary rights in such developments shall be and are hereby transferred, sold, conveyed and assigned to MSFT. To the maximum extent permitted by law, Subsidiary hereby assigns to MSFT and waives and agrees n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Agreement, clauses 2 and 5 of the original PSA stood substituted as under : - '2. RESEARCH AND DEVELOPMENT Subsidiary hereby agrees to undertake such research and development work as requested and approved in writing by MSFT from time to time. Subsidiary may subcontract with third parties to perform some or all of such work upon MSFT's approval. In the event that MSFT contracts directly with vendors in country, MSFT may request the subsidiary to provide assistance with regard to such contracts. Subsidiary's responsibilities are limited to best efforts to develop code or otherwise complete the project, not use IP not owned by MSFT, and deliver per project specifications as provided by MSFT.' 5. INTELLECTUAL PROPERTY MATTERS Research and Development. Subsidiary agrees that any and all developments made by it or under Subsidiary's direction, in connection with the performing of research and development work for MSFT shall be owned by MSFT in their entirety. Such developments shall (to the extent possible) be deemed "works made for hire" created by Subsidiary for MSFT pursuant to 17 U.S.C. Section 102(b). All copyrights (to the extent (if at all) not already owned by MS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded PSA, which categorically sets out that its work will not be confined to developing code but also otherwise completing the project assigned to it by Microsoft, USA. 24. The assessee continued to carry on full-fledged research work albeit in respect of a part of the overall Microsoft product, which is further established from the fact that the patents registered in USA for work done in India amounted to 113 in number over a period of five years with 6 patents in 2008, 16 in 2009, 22 in 2010, 33 in 2011 and 36 in 2012. We have randomly gone through abstracts of some inventions done by the assessee in India which were registered in the USA for patents. The first one is dated 11.06.2013 which is 'extracting topically related key words from related documents.' Abstract of this work has been given as:- "Keyword extraction technique embodiments are presented which extract topically related keywords from a set of topically related documents. In one general embodiment, this keyword extraction involves first accessing a set of topically related documents. A number of candidate keywords are then identified from the set of related documents. A weighted keyword candidate-document matrix i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pre-populated topic list, and then clustering to find the most informative ones." 27. In the same way, there are total 113 inventions carried out by the assessee, which were registered in the USA. This speaks volumes of the level of work done by the assessee in India culminating into the creation of intellectual properties at its end. It is simple and plain that in order to be eligible for patent, there has to be first some invention and further such invention must meet several criteria to get patent protection, such as, the invention must consist of patentable subject matter; it must be new (novel); it must involve inventive steps. A simple testing and coding does not result into an invention, much less its patentability. The fact that 113 patentable inventions were done by the assessee in India by its software development work, which were registered in the USA, leaves no room for doubt that it is undoubtedly engaged in research activities and is significantly different from a routine software developer. 28. The assessee has harped on its role as limited to providing services in relation to certain functions or modules within a product and not for the whole product itself which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the assessee to undertake research and development and actual creation of intellectual property in India patented in the USA, coupled with the shyness of the assessee in furnishing the primary evidence of the requisition of work by Microsoft USA and the final output etc. before the TPO and also the Tribunal amply prove that the submissions made by some of the company's Officers before APA Authorities of not being involved in any research work, do not merit acceptance. Taking a holistic view of the matter, we have absolutely no doubt in our mind that the assessee is providing research and development software services to Microsoft, USA. 31. At this stage, it is imperative to note Circular no. 3/2013 dated 26.03.2013 which lays down certain guidelines for identifying if a Development centre in India is a contract R&D service provider with insignificant risk. It sets out the following guidelines for taking a decision on the point : - "The CBDT has carefully considered the matter and lays down the following guidelines for identifying the Development Centre as a contract R&D service provider with insignificant risk. 1. Foreign principal performs most of the economically signific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case. In doing so, the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall be guided by the conduct of the parties and not merely by the terms of the contract." 32. The ld. AR contended that the guidelines laid down in the Circular are not final inasmuch as it is further provided therein that the above guidelines should be seen on the totality of facts and circumstances and the TPO shall be guided by the conduct of the parties and not merely by the terms of the contract. The ld. AR also referred to first, second and fourth reports of the Rangachary Committee dated 14.09.2012, 13.10.2012 and 05.12.2012 respectively, constituted to review taxation of Development Centres and IT Sector for accentuating the features of captive R&D Development Centres in India. 33. We have gone through the salient features given in these reports of the Committee. It is pursuant to such reports that the CBDT came out with the above Circular specifying the guidelines for identifying if a Development Centre in India can be termed as a contract R&D service provider. The recommendations of the Committee, to the extent of incorporation in the Circular, should be considered to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orks under the direct supervision of MS, USA without having any economically significant risk and further having no ownership right on the outcome of the research, which vest with the MS, USA. 35. It is further interesting to note that the assessee vide its letter dated 12.01.2015, copy placed on page 664 onwards of the paper book, impressed upon the TPO that it: "must be characterized as a contract R&D service provider bearing insignificant risks……………….. we re-confirm that the functional profile of the assessee has remained unchanged from past year and the assessee continues to be a development centre undertaking contract R&D activities with insignificant risk as per Circular 6/2013." The above discussion brings us to an irresistible conclusion that the assessee is a contract R&D service provider. 36. Having seen the nature of work done by the assessee, we now proceed to examine the companies challenged before us. First of all, we take up the exclusions sought by the assessee from the list of comparables finalized by the TPO. In fact, the TPO shortlisted four companies, including Persistent Systems Ltd., which was assessee's comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion by contending, inter alia, that it is engaged in noteworthy R&D activities apart from having significant intangible assets and exceptionally high turnover. The assessee also submitted that this company is functionally not comparable as it is also having revenues from software products. The assessee's objections have been recorded on pages 80-82 of the TPO's order. Not convinced, the TPO held this company to be comparable, which has been assailed in the impugned order. 40. Having heard both the sides and perused the relevant material on record, we find from the Annual report of this company, a copy of which is available on pages 1653 onwards of the paper book, that this company is also engaged in earning revenue from Licensing of software products. This fact has also been recorded in the TPO's order noting that the revenue from software products stands at ₹ 1,285/- crore. This revenue has been generated from its product 'Finacle', reference to which has been made on page 8 of the Director's Report. The extent of profit from software services, in the overall kitty of profits from software services and software products, cannot be separated because of the merged expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany so originally reported as comparable is, in fact, not comparable. Simply because a company was wrongly chosen by the assessee as comparable, cannot tie its hands from contending before the Tribunal that such a company was wrongly considered as comparable which is, in fact, not. There is no qualitative difference between a situation where an assessee claims that a wrong company inadvertently included for the purpose of comparison should be excluded and the situation in which the Revenue does not accept a particular company chosen by the assessee as comparable. The underlying object of the entire exercise is to determine the arm's length price of an international transaction. Simply because a company was wrongly considered by the assessee as comparable, cannot, act as a deterrent from challenging before the Tribunal the fact that this company is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action' is that the companies or transactions, in order to fall within the ambit of sub-clause (ii) of rule 10B(1)(e), should be both comparable as well as uncontrolled. 'Uncontrolled transaction' has been defined in Rule 10A(a) to mean: 'a transaction between enterprises other than associated enterprises, whether resident or non-resident.' This shows that in order to be called as an uncontrolled transaction, it is essential that the same should be between the enterprises other than the associated enterprises. Section 92B(2) provides that: 'A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables, but, excluded by the TPO. In all, the assessee selected 27 companies including M/s Persistent Systems & Solutions Ltd., which got accepted at the hands of the TPO but excluded by us hereinabove, on a challenge made by the assessee. Out of the remaining 26 companies, the assessee has challenged the exclusion of 12 companies by the TPO from the list of comparables, which we will take up one by one for consideration and decision. (i) Akshay Software Technologies Ltd. 49. The assessee included this company in the list of comparables which was excluded by the TPO by noting on page 56 of his order that it was not involved in rendering high-end software services. He further noticed on page 68 that it was a routine software trader and was not engaged in rendering any high-end software services or contract research and development, as the assessee was doing. No relief was allowed by the DRP. 50. Having heard both the sides and perused the relevant material on record, we find from the Directors' report of this company, whose copy has been placed on record by the ld. AR, that it is also engaged in sale of Products, which fact gets reflected from the first item, being 'Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Account of this company is placed at page 91 of the paper book, which shows 'Sales and software services income' on the Income side. Schedule-J, being, Significant Accounting Policies and Notes to the Financial Statements provides under the head 'Revenue recognition' that: "Revenue from sale of traded software licences and traded hardware is recognized on delivery to the customer." This makes it apparent that, apart from rendering software services, this company is also into software products and hardware. The Director's Report of this company clearly sets out under the heading 'Research and Development' that: "The company is predominantly a service provider and, therefore, has not set up a formal research and development unit". It thus transpires that this company cannot be considered as comparable as apart from being a product company and dealing in hardware also, it is also not providing any R&D services. The view taken by the authorities is, thus upheld. (iii) Caliber Point Business Solutions Ltd. (Others segment). 54. The TPO held this company to be not comparable by noting on page 56 of his order that it was not rendering any high-end software services. He further held on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this company was rightly excluded. (v) CG-VAK Software & Exports Ltd. 58. The TPO excluded this company by noting on page 57 of his order that it was not involved in rendering any high-end software services and, further, recorded on page 70 of his order that it was a persistent loss making company, against which the assessee has come up in appeal before the Tribunal. 59. We have heard the rival submissions and perused the relevant material on record. It is observed from page 70 of the TPO's order that as per Prowess data base, profit before interest and taxes of the software segment of this company is in negative for the financial years 2007-08 to 2010-11. For the financial year 2007-08, there is loss of (-) 0.10%, for the F.Y. 2008-09, there is loss of (-) 0.15%, for the F.Y. 2009-10, there is loss of (-) 0.73% and for the F.Y. 2010-11, there is loss of (-) 0.21%. The assessee tried to make out a case before the TPO that his calculation of margin was not correct by advancing its own calculation which has been set out at page 71 of the TPO's order. It is apparent even from such calculation that from the year ending 31.03.2008 to year ending 31.03.2011, there are persistent lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le software service provider, we approve the exclusion of this company from the tally of comparables. (viii) Maveric Systems Ltd. 63. The TPO excluded this company by mainly observing on page 58 of his order that it was not involved in rendering high-end software services, against which the assessee has approached the Tribunal. 64. We have examined the Annual report of this company, a copy of which is available on record. It can be seen from such Annual report that it is engaged in rendering routine software development services and not research and development software services. Though this company carried out some research and development, as is apparent from its Directors' Report, but, the research and development was done for "creation of tools and frameworks that help 'Design Better TEST Umbrella' and 'execute faster (automate) umbrella.'' There is no income from rendering Research and development services as against its operating income of ₹ 56.90 crore. On the other hand, there is only a spend of ₹ 45.63 lac on research and development. Since R&D activity done by this company is meant for its own use and it has not earned any revenue from rendering R&D servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee under consideration for the purposes of benchmarking. The impugned order is overturned to this extent. (x) R.S. Software (India) Ltd. 67. The TPO excluded this company by noting on page 58 of his order that it was not involved in any high-end software services and, further, on page 76 that it was not into any research and development. 68. We have examined the Annual report of this company. Income from software development has been shown in the Profit & Loss Account, whose copy is available on page 823 of the paper book. The ld. AR could not point out anywhere from the Annual report that this company is engaged in rendering R&D software services. Since it was a comparable chosen by the assessee, the onus is on it to show the comparability. The same being not involved in rendering any R&D software development services becomes functionally different and hence cannot be considered as comparable. It is therefore, held to have been rightly excluded. (xi) R. Systems International Ltd. (Segment) 69. The assessee included the 'Software Development & Customisation Services Segment' of the company in the list of comparables. The TPO excluded the same by noticing on page 58 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this company is not comparable to the assessee company. 71. In view of the above functional differences, there is no need to look for data relevant to the period 01.04.2010 to 31.03.2011. We, therefore, approve the exclusion of this company on segmental level from the list of comparables on account of functional dissimilarity as noted by the TPO. (xii) Silverline Technologies Ltd. 72. The TPO excluded this company by assigning two reasons. One has been given on page 58 of his order to the effect that this company is not involved in high-end software services and the second reason is given on page 76, being, the non-availability of data for the relevant financial year ending. 73. We have gone through the Annual report of the company whose copy has been provided in the paper book. It can be seen from internal page 3 of the Annual report, which is a message from the Chairman that the : 'Company's Service Management team has announced that its Software-as-a-Service 'SaaS' based ITIL incident management software, iCare, is now available on Research in Motion's Playbook platform as well as on website'. This graphically demonstrates that the company is also engaged in sale of Produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle with the grant of working capital adjustment. Since the necessary details qua the grant of such an adjustment have not been examined because of refusal to grant such adjustment at the threshold, we are of the considered opinion that it would be fit and proper to set aside the impugned order on this issue and send the matter back to the file of the AO/TPO to carry out the working capital adjustment in the light of our above discussion. Once it is held that such an adjustment is permissible, then it should be carried out whether it favours or disfavors the assessee. It goes without saying that the assessee will be allowed an opportunity of hearing in such fresh determination of the working capital adjustment, if any. 78. The only other point urged by the ld. AR under this international transaction is with reference to the computation of the assessee's own PLI. In this regard, it was submitted that rental income earned by it to the tune of ₹ 17,22,16,198/- was considered as non-operating income. However, the assessee inadvertently did not exclude the corresponding expenses relating to such rental income from the total operating expenses. It was shown that the TPO him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r pricing addition before the Tribunal. 81. We have heard both the sides and perused the relevant material on record. The assessee has challenged the inclusion/exclusion of certain companies from/to the final tally drawn by the TPO. Before adverting to the comparability analysis, it is sine qua non to examine the functional profile of the assessee under the international transaction of 'Provision of IT enabled services.' It is seen from the TPO's order that the assessee entered into a Product Support Services Agreement dated 01.07.2002 with MS Corporation to provide IT enabled services and such services were rendered through the establishment of Global Support Centre (India GSC) in Bangalore. It is further noticed from the TPO's order that ITES rendered by the assessee are a part of the 'Customer Support Services' arm of the Microsoft group, which supports a wide array of customer segments, from individual home users to corporate users. We have also gone through the assessee's Transfer pricing study report, which also throws some light on the nature of services provided under this international transaction. It is borne out from page 59 of the TP Study Report that the assessee's te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eers interact with the customer, understand the root cause of the problem and provide a resolution. He further answered to question no.12 that MS Corporation provides process tools with the help of which the assessee renders services to its customers. From the above discussion, it is clear that unlike the international transaction of 'Provision of software development services', there is no conflict in the version of nature of services as given in TP documentation, PSSA Agreement and the interviews done by APA Authorities. There is complete unison in all of them about the nature of services rendered under this international transaction, being that of receiving calls and resolving technical problems of the customers of Microsoft Corporation. With the above understanding of the nature of work done by the assessee in this segment, we now proceed to examine the comparability of the companies challenged before us. First of all, we take companies included by the TPO, which the assessee has contested as not comparable. (i) Accentia Technologies Ltd. 83. The TPO treated this company as comparable despite the assessee's initial inclusion and later exclusion, by observing that it is engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Income', there is a first item of 'Sales and services.' Under the head 'Segment information' in 'Notes to Accounts', it has been mentioned that: 'Company has only one segment of activity, namely, 'healthcare receivable management', therefore, segment reporting as defined in AS-17 does not apply.' From the above discussion, it transpires that this company is not only earning income from sale of software Products as well, but is having a common pool of income both from products and services and there is no bifurcation of income available from sale of products and rendering of services. In this view of the matter, it becomes clear that this company is nowhere close to the exclusive ITES segment of the assessee company. The Hon'ble Delhi High Court in Principal CIT vs. B.C. Management Services Pvt. Ltd. (2018) 403 ITR 45 (Del), has held that Accentia Technologies Pvt. Ltd. is engaged in KPO services and is, hence, not comparable with a company providing ITES. This decision has also been rendered for the assessment year 2011-12, which is under consideration in this appeal. We, therefore, order to exclude this company from the list of comparables. (ii) ICRA Techno Analytics (Seg) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing and technical services. 'Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by the Citi group to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities'. Thus, it is evident that the income of this company also includes the income from software development services, which are covered under 'Technical services' involving software testing, verification and validation of software. Pages 90/97 of the Annual report depict that the company has only one segment named as BPO (transcription processing services). Since the assessee in the instant international transaction is not rendering any software development services and the activities are confined to resolving problems of the enterprise customers in the software products, being categorized as ITES, this company ceases to be comparable. We, therefore, order to exclude it from the list of comparables. 89. Now, we take up the companies challenged by the assessee, which were included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. We, therefore, uphold the exclusion of this company from the list of comparables. (ii) R. Systems International Ltd. (Seg.); 92. The assessee included this company on segmental level in its list of comparables. However, the TPO eliminated the same by noting that it was following different year ending, namely, 31st December and, hence, was not comparable. The ld. AR fairly accepted that the above company was following calendar year for maintaining its accounts in contrast to the assessee following financial year ending 31st March. It was, however, submitted that this company should not have been excluded for this reason alone when it was otherwise functionally similar, a fact which has not been denied by the TPO. The ld. DR opposed this contention by submitting that the data for the year ending of this company was not similar to that of assessee company and hence it was rightly excluded. 93. We have heard both the sides on the issue. Unlike the international transaction of 'Provision of Software development services', the TPO has not disputed functional similarity of the relevant segment of this company with the assessee's international transaction of 'Provision of IT enabled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeds in providing the relevant data of this company for the concerned financial year on the basis of the information available from the Annual reports only, the TPO should include the appropriate segment of this company in the list of comparables by considering its OP/TC for the financial year ending on 31.3.2011. If, even though its quarterly data is available and can be compiled for the relevant financial year, but the amounts of operating profit or operating costs etc. for the relevant financial year are not directly available without any apportionment or truncation, then this company should not be considered as comparable. The Hon'ble Punjab & Haryana High Court in CIT vs. Mercer Consuling (India) P. Ltd. (2017) 390 ITR 615 (P&H) has approved the similar view of the Tribunal by holding : 'that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B.' We direct accordingly. (ii) Calibre Point Business Solutions Ltd. (Seg.) 94. The TPO held this company to be not comparable on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section provides that the arm's length price in relation to an international transaction shall be determined by any of the given methods, being the most appropriate method, having regard to certain factors. Proviso to sub-section (2), which assumes significance for the present purpose, states that : 'where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices'. In contrast, some countries have adopted the inter-quartile range, which is also called the mid-spread or middle-fifty, instead of arithmetic mean of all, as used in India. When arithmetic mean is taken of the all the otherwise comparables companies, it tends to iron out the differences due to higher or lower size of a company or vacillating profitability rates. A company otherwise found to be functionally comparable cannot be excluded either on the ground of higher or lower profit rate or higher or lower turnover. There is no mention in the language of the provision for the exclusion of potential comparable companies simply on account of high or low turnover or profit rate. The Special bench of the tribunal in Maersk Global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was also submitted that it was outsourcing substantial amount of its work to outsiders. The DRP did not approve the view canvassed by the TPO. Relying on the judgment of the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 279 CTR 441 (Del), the DRP directed to exclude this company from the list of comparables. The Revenue is aggrieved by such exclusion. 100. We have heard both the sides and gone through the relevant material on record. The ld. DR contended that this company ought to have been retained in the list of comparables as the assessee was also providing KPO services, which was countered by the ld. AR. 101. We are unable to approve the view taken by the ld. DR for the reason that under the international transaction of Provision of ITES, instantly under consideration, the assessee company is not rendering any KPO services. As noticed above, the nature of work carried on by the assessee under this international transaction is that of receiving complaints from the customers of Microsoft Corporation and then resolving their technical problems. Thus, this activity cannot be described as KPO. The Hon'ble Delhi High Court in Rampgre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resh in accordance with the view taken in such immediately preceding year, after allowing a reasonable opportunity of being heard to the assessee. 107. Ground no. 19 is against not treating interest income of ₹ 3,13,60,627/- earned on fixed deposits by the Bangalore undertaking as eligible for benefit u/s 10A of the Act. The ld. AR candidly admitted that this issue was neither raised before the Assessing Officer or DRP and the same being a legal issue, should be admitted by the Tribunal. The ld. DR objected to the admission of this ground. 108. Having gone through the nature of issue raised through this ground, we find that this is a legal issue and can be raised before the Tribunal for the first time. We, ergo, admit this issue for consideration. 109. In support of its contention, the assessee has filed additional evidence to bring home its point about the availability of benefit u/s 10A in respect of interest income. Since this issue has not been examined by the authorities below and the assessee has filed additional evidence, we are of the considered opinion that it would be in the fitness of things if the Assessing Officer is directed to decide this issue afresh as per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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