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TMI Blog2018 (10) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... rd, the Tribunal rejected the assessee's contention by chiefly observing that the TP study made available by the assessee was found to be not fully in compliance with the provisions of the Act and Rules and further the exclusion of some comparables and other adjustments made by the TPO tantamount to its implied rejection. This is how, the appeal is now being taken up for final disposal on all other grounds. PROVISION OF SOFTWARE DEVELOPMENT SERVICES (Hyderabad Unit) 3. The first issue raised by the assessee in its appeal is against the addition on account of transfer pricing adjustment amounting to Rs. 197,23,68,765/- made by the Assessing Officer (AO) in the international transaction of ' Provision of Software Development services'. 4. Briefly stated, the facts of the case are that the assessee was set up in India in May, 1998 and is a subsidiary of Microsoft Ireland Research Ltd., Ireland (99.99% shareholding) with the ultimate parent company, Microsoft Corporation, USA. The assessee is engaged, inter alia, in rendering Software development services and Information Technology Enabled Services (ITES). The assessee filed Audit Report in Form no. 3CEB declaring six international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , namely, Product Definition, Product Engineering and Servicing. Under the Product Definition (Conceptualization Phase), a value proposition and a product prototypes are developed based on customer feedback etc. Then, marketing research is performed to test the value proposition and the marketing feasibility of a product prototype, which closes the first phase. This phase was stated to be performed entirely in US by MS Corp except for a very limited role being played by the assessee in India. In the second phase of Project engineering which is a five-step process involving determination of the requirements, design, implementation, verification and release, the assessee submitted that the bulk of this activity takes place in the US at MS Corp. and the assessee has a limited input into the design of the product. The final phase of Servicing was stated to be performed in the US by MS Corp. In the entire software product lifecycle, the assessee submitted that it provided limited services to MS Corporation and that too under their directions. The assessee also stated to have provided software development services to Microsoft, USA, by developing software applications exclusively for MS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted companies by the TPO in/from the final list of comparables. 7. Comparability of companies can be gauged only after fully ascertaining the functional profile of the assessee in respect of the international transaction under challenge. Thus, the first and the foremost task at our end is to identify the nature of actual services rendered by the assessee to Microsoft, USA under this international transaction. The assessee's main plank of submissions before the TPO was that it provided limited services to MS Corp., USA in the product development cycle, which activity was wholly supervised by MS Corp., USA and done in different countries and the assessee was simply involved in creating some features within the overall product, which made it an ordinary captive low profile software developer. On the other hand, the case of the Revenue is that the assessee is engaged in providing high end software development services involving innovations and the same are in the context of products to be launched in future and such services result in creation of intangibles, which are distinct from a routine software development. 8. In this regard, we first advert to the version of the assessee on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reating ten inch language tools which are available for free for download from Microsoft (page 15 footnote of the TP study). The TPO has recorded in para 2.8 on page 46 of his order that the patents were created by the assessee in India in respect of the work done by it, which were registered in USA. This fact, in the opinion of the TPO, abundantly established that the assessee is rendering high-end software development services, which are unique and quite different from normal software activities. 9. The ld. AR heavily relied on interviews of certain employees of the assessee-company conducted by the Advance Pricing Agreement (APA) Authorities in September, 2013 to buttress his point that the assessee was providing routine software development services of coding and testing and that too, under the direct supervision of Microsoft, USA, and further such services were of little consequence in the overall MS products. It was submitted that in these interviews all the officials categorically stated that the direction for doing the work came from MS, USA and the execution was done strictly according to such directions. A view was canvassed that these statements graphically divulged tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record to substantiate that anything was submitted later. In response to question no. 6, he stated that the IDC team works on different features in different Windows versions e.g., Windows Store work going back to Redmond and the IDC team working on something totally different for the next version of Windows. In response to question no. 8 about the degree of functional autonomy, he stated that: "Once I have the feature or sub-feature task assigned to me, I would have autonomy to engineer/execute on this (as long as it is independent)." Next is the interview of Mr. Nitin Chandel with the designation of Partner Engineering Manager, Bing Ads Team, Bangalore. In response to question no.1, he stated that as a Partner Engineering Manager, Bing Ads team have carried out three functions, namely, Development, Test and PM. In response to Question no.3(e), he stated that they sometimes use vendors (such as Infosys) to do some work. A common thread running through all the interviews is that they admitted that the work was assigned to them by MS, USA which is only a feature of the overall product and not the product in itself and further that the work was done by them for MS, USA and the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt (PSA) dated 01.07.2003 that it undertook the activity of research and development work as requested and approved in writing by MS Corporation from time to time, but, no such evidence was furnished by the assessee despite being specifically asked to do so vide letter no.543 dated 15.12.2014. Thereafter, it has been noted by the TPO in para 2.5 of the show cause notice, which has been reproduced in his order, that though the assessee admitted in its TP Study report that it had a varying role to play in all the three phases, namely, Product Definition, Product Development and Product Servicing, but no elaboration of the degree of role played was done by the assessee. 12. Notwithstanding the above interviews, the assessee itself summarized its role before the TPO in different stages of the Software Product Lifecycle by means of a Table, which has been reproduced on page 42 of the TPO's order, reading as under :- Type of functions MIRPL MS Corp. Conceptualisation and scoping of project work including defining functional specifications Very Limited Yes Project execution Yes subject to supervision by MS Corp. Yes Coding, testing and documentation Yes, as per the directio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ializing its role as restricted only to coding and testing of some features of the Microsoft products but also failed to substantiate the same. 15. With a view to give one more chance to the assessee to substantiate its version about the nature of work carried out in this international transaction, the Bench required the ld. AR to produce primary evidence of the work actually done with the help of Requisition and disposal registers etc. divulging the date when a particular work was assigned to it, how many days it took in doing the same, how many man-hours went into its doing, what was the final output and when was it sent to the AE. The ld. AR refused to share any such primary data and harped on the interviews conducted by the APA Authorities, whose relevance at this juncture has been discussed supra. It is apparent that the assessee was not only obliged to but has, in fact, maintained such complete records. We have extracted infra the relevant parts of the PSA between the assessee and Microsoft, USA, which clearly provide that the 'Subsidiary (i.e. the assessee) hereby agrees to undertake such research and development work as requested and approved in writing by MSFT ( i.e. Micr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the examination of such an evidence was not warranted as the interviews done by the APA Authorities gave enough hints about the work done. Such a submission that the authorities should decide the nature of work done without looking into primary evidence of the actual work done is not only strange but totally out of place. How an assessment is to be done falls in the exclusive domain of the authorities. The assessee cannot be allowed to dictate to the authorities as to the nature of evidence to be examined and the extent of such an examination for determining the issues which are of immense importance in the assessment. It is the sole prerogative of the authorities to decide the course of action and the nature of evidence to be examined for enabling them to complete the assessment, as long as their requirements do not breach the level of reasonableness and relevance. 18. Reverting to the point, the issue is the examination of comparables, which can't be decided unless the assessee's functional profile is fully understood. Examination of primary evidence of the work done by the assessee for this purpose is critical, without which the exercise of comparability cannot be undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary hereby assigns to MSFT and waives and agrees never to assert any and all moral rights, including neighboring rights, in such developments. Subsidiary shall itself, and shall require all individuals or entities working with Subsidiary in connection with the performing of research and development work for MSFT to execute and deliver such instruments and take such other action as may be required to carry out the transfer, sale, assignment or waiver of copyright, patent and other proprietary rights contemplated by this Section 5.1. Any documents, magnetically, optically or otherwise encoded media, or other materials created by Subsidiary, or under Subsidiary's direction, in performing research and development work for MSFT shall be owned by MSFT in their entirety. 5.2 Other Research and Development, including Without Limitation, Localization, Consulting and Training. As further consideration for the rights granted to Subsidiary by MSFT pursuant to this Agreement, Subsidiary hereby acknowledges MSFT ownership of all copyrights, patents and other proprietary rights in: (i) any development work performed by Subsidiary whether or not it relates to MSFT Products and Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 never to assert any and all moral rights, including neighboring rights, in such developments. Subsidiary shall itself, and shall require all individuals or entities working with Subsidiary in connection with the performing of research and development work for MSFT to execute and deliver such instruments and take such other action as may be required to carry out the transfer, sale, assignment or waiver of copyright, patent and other proprietary rights contemplated by this Section 5.1. Any documents, magnetically, optically or otherwise encoded media, or other materials created by Subsidiary, or under Subsidiary's direction, in performing research and development work for MSFT shall be owned by MSFT in their entirety. MSFT owns all rights to Covered Intangibles, takes all risk of successfully marketing such Covered Intangibles, and takes all risks not otherwise herein expressly taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghted keyword candidate-document matrix is formed using these candidate keywords, and it is partitioned into multiple groups of keyword candidates. Dense clusters of keyword candidates whose density exceeds a prescribed density threshold are then identified in each of the groups of keyword candidates. Finally, the keyword candidates associated with each dense cluster are designated as topically related keywords." 25. Another creation of intellectual property by the assessee in India which has been patented in USA on 08.01.2013 is 'resource allocation framework for wireless or wired network.' Abstract of this work is as under:- A resource allocation framework for wireless/wired networks is described. In an embodiment, methods of end host based traffic management are described which operate separately from the underlying access control protocol within the network (e.g. wireless MAC protocol or TCP). The rate limits for each flow are set based on per-flow weights, which may be user specified, and based on an estimate of the utilization of the shared resource and the rate limits are adjusted periodically so that the resource is not underutilized or saturated. Some embodiments comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not for the whole product itself which, in turn, is assembled by MS Corporation in Redmond, USA. The ultimate products made by Microsoft, USA, involve several software, some of which are developed by its AEs in different parts of the world including the assessee. Even though integration of all the software developed in several countries is done in the USA, that does not mean that the research work done by the assessee or for that matter by AEs in the other countries, ceases to be a research work in itself. In such circumstances, it cannot be said that research work is done exclusively by Microsoft, USA, which is bringing together the research work done by several entities. In fact, all the entities contributing to the bringing out of a new product or a new version of the existing product by means of inventions, are doing research work. The assessee cannot be compared with a run-of-the-mill software developer as has been unsuccessfully attempted by the ld. AR. Au contraire, it is involved in the development of Microsoft products, though as an organ and in a limited way, but, within the scope of work assigned, it is undertaking research and development and creating intangibles, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erforms most of the economically significant functions involved in research or product development cycle either through its own employees or through its associated enterprises while the Indian Development Centre carries out the work assigned to it by the foreign principal. Economically significant functions would include critical functions such as conceptualization and design of the product and providing the strategic direction and framework; 2. The foreign principal or its associated enterprise(s) provides funds/capital and other economically significant assets including intangibles for research or product development. The foreign principal or its associated enterprise(s) also provides a remuneration to the Indian Development Centre for the work carried out by the latter; 3. The Indian Development Centre works under the direct supervision of the foreign principal or its associated enterprise which has not only the capability to control or supervise but also actually controls or supervises research or product development through its strategic decisions to perform core functions as well as monitor activities on regular basis; 4. The Indian Development Centre does not assume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Circular, should be considered to have been accepted by the Government. In that view of the matter, it is vivid that guidelines laid down in the Circular, though not conclusive, but are of some relevance in deciding if a particular Development Centre in India is a contract R&D service provider. On testing the facts of the case on the touchstone of the Circular, it is manifested that the assessee is satisfying all the ingredients except the one given at Sl. no. 5 which is not applicable to the facts of the instant case since Microsoft, USA is not located in a country perceived as a low tax or no tax jurisdiction. It can be seen that Microsoft, USA is performing most of the economically significant functions involved in research or product development cycle, while the assessee as an Indian Development Centre carries out the work assigned to it by the foreign principal (Sr. no. 1). Microsoft, USA is remunerating the assessee with cost plus 15% for the work carried out by it and is also providing its intangibles in the shape of Process tools (customised software, readymade templates and guidelines, etc.) to the assessee for doing the work (Sr. no. 2). The assessee is working under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable. The assessee has assailed the inclusion of all the four including its own comparable. We will deal with all of them in seriatim. (i) E-Infochips Bangalore Limited. 37. The TPO proposed to include this company. The assessee objected to the same by contending that it was functionally different and failed the service income filter along with diversified operations and non-availability of segmental data. The TPO rejected such contentions by noticing that the assessee as well as E-Infochips Bangalore Ltd., were engaged in the development of software. He, therefore, included it in the list of comparables, against which the assessee has come up in appeal before us. 38. Having heard both the sides and perused the relevant material on record, it is observed from the Annual report of this company for the year ending 31.03.2011, a copy of which has been placed on record, that its income from Software services as recorded in the Profit & Loss Account is Rs. 45.11 crore. A detail of such income is given as per Annexure-7 which reveals Income from software services at Rs. 27.98 crore and Consultancy charges at Rs. 17.12 crore. Segmental information has been given in the Note no. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that the total profit of this company includes profit from software development services as well as software products and there is no separate profit available of the software development services, we are unable to countenance the comparability of this company as the assessee is not engaged in licensing of any software products. We, therefore, order to exclude Infosys Technologies Ltd. from the list of comparables. (iii) Persistent Systems Ltd. 41. Though this company was included by the assessee in its list of comparables, the same has still been challenged before us. The ld. AR contended that this company was erroneously included in the list of comparables as it is also a product company which is apparent from the Annual report of this company. 42. The ld. DR raised a preliminary objection to the effect that once a company has been considered by the assessee as comparable in its TP documentation and the same has been accepted by the TPO, the same cannot be challenged in the further appellate proceedings. He relied on the impugned order to contend that this company was rightly offered by the assessee in the list of comparables and, hence, the same should not be exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Similar view has been upheld by the Hon'ble Delhi High Court in Xchanging Technology Services India Pvt Ltd [TS-446-HC-2016(DEL)- TP]. The Hon'ble Bombay High Court in Tata Power Solar Systems Ltd [TS-1007-HC-2016(BOM)-TP] and the Hon'ble Punjab & Haryana High Court in CIT VS. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P&H) have also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR. 44. Coming to the comparability or otherwise of this company, we find from its Profit & Loss Account that its income from 'Sale of software services and products' stands at Rs. 6,101.27 millions. Product revenue is 7.2% of the total revenue. Thus, it is established that this company is engaged in rendering software development services as well as sale of software products. Even though the percentage of software products in the total revenue is less, yet, the same ceases to be comparable as there is no precise information about the contribution made by the income from sale of software to the total income of the company. In the absence of any segmental information provided by the company in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here exists a prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If such an agreement exists, the third person is also considered as an AE and the transaction with such third person becomes international transaction within the meaning of section 92B. Once there is a transaction between two associated enterprises, it ceases to be an 'uncontrolled transaction' and, thereby, goes out of reckoning under Rule 10B(1)(e)(ii). 47. Coming back to the facts of this company, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices and Products' under point 1(i), that is, 'Financial Results'. Page 5 of the Annual report, being, Annexure to the report of Board of Directors records that: "The company is a service provider and therefore has not set up a formal Research and Development unit." Page 15 of the Annual report is a copy of its Profit & Loss Account, which shows income from operations as 'Income from software services and products' at Rs. 11,47,22,327/-. Thus it becomes apparent that this company, unlike the assessee, is not only not engaged in rendering Research and development services, but is also in the sale of Products, thus losing the comparability. The reasoning given above for exclusion of Infosys Technology Ltd. and Persistent Systems Ltd., as those also being Product companies, applies with full force to the exclusion of this company as well. 51. The ld. AR submitted that income from Products of this company was separable inasmuch as the figures of opening stock, purchases and sale of products were separately given in the Annual report. He, however, could not point out the amount of other operating expenses separately, included in the overall operating expenses, connected with sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany was carrying BPO services. 55. After considering the rival submissions and going through the Annual report of this company, a copy of which has been placed by the ld. AR on record, it can be seen from Schedule-12, being, Significant Accounting Policies and Notes Forming Part of Accounts that under the head 'Revenue recognition', it has been mentioned that: "The company's revenue from process outsourcing and software support and related activities arise from unit priced contracts, time based contracts and fixed price projects." Unlike the assessee, this company is not rendering any research and development software services to its AEs. On the contrary, it is also providing BPO services, which make it non-comparable with the segment of the assessee-company under consideration. We, therefore, approve the view taken by the authorities on the exclusion of this company. (iv) Cat Technologies Ltd. 56. The TPO excluded this company by observing on page 57 of his order that it was not providing any high-end software services. He noticed from the Annual report of this company that its exclusive business was Medical transcription, training, software development and consulting service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.36% and (-) 3.70% respectively. In view of the fact that this company is a persistent loss making company in the relevant segment, the same ceases to be comparable. Even otherwise also, this company is not functionally similar as has been noted by the TPO on page 57 of his order that it is not engaged in rendering high-end services. The ld. AR could not draw our attention towards anything from the Annual report that this company under the relevant segment was also rendering any software research and development services. We, therefore, uphold the impugned order in removing this company from the list of comparables. (vi) Evoke Technologies Pvt. Ltd. 60. The assessee included this company, which got excluded by the TPO by observing on page 57 of his order that it was not engaged into any research and development, as was the assessee doing. The ld. AR fairly admitted that this company is not into rendering research and development services. He, however, maintained that rendering or not rendering of research and development software services cannot be a criterion to determine the comparability of a software company. In our considered opinion, this argument is far-fetched inasmuch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered as comparable with the assessee, which is engaged in providing R&D software services to its AE under the current segment. Following the view taken hereinabove on similar lines, we approve the impugned order on excluding this company from the list of comparables. (ix) Mindtree Ltd. (IT Service Segment) 65. The TPO held this company to be not comparable by observing on page 58 of his order that it was not involved in rendering any high-end software services. 66. We have examined the Annual report of this company, a copy of which has been placed on record. Annexure to the Directors' Report provides under the head 'Research and Development' that this: "Company has a dedicated business unit for research and development which offers innovative solutions to clients and also fosters R&D within all business units to create intellectual property in the form of re-usable components, frameworks, etc., which help drive correct productivity." On next page of the Annexure to the Directors' Report, a list of patents registered either in India or the USA has been appended, which are 19 in number. Profit & Loss of this company shows 'Income from software development' at Rs. 15,090 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e services. Then, on page 76, the TPO also noticed that the financial data of this company was available for a period of 12 months ending 31.12.2010. That is how, he held this company to be not includible in the list of comparables. The assessee is aggrieved by this exclusion. 70. We have heard both the sides and perused the relevant material on record. First of all, we take up the functional difference as noticed by the TPO on page 58 of his order. We have gone through the Annual report of this company, a copy of which has been provided in the paper book. It can be seen from the message of the company's Chairman, which is there on page 13 of the Annual report that under the heading 'Our business', it has been narrated that its : 'core service offerings include Product Engineering, sold under our brand of iPLM Services; IT enabled Business Process Outsourcing (BPO) services and consulting services for Enterprise Applications such as Business Intelligence and Analytics, ERP and Mobility'. It has further been mentioned on the same page that: "R Systems products group consists of two units. Indus(r) which address the retail lending, telecommunication and insurance industry and ECnet( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it & Loss Account which has the first item under the head income as 'Sales and services.' It is further pertinent to note that though this company is also engaged in Research and development as is apparent from page 9 of its Annual report, but, the : "R&D activities include tools development with the object of devising efficient methods of preproduction phase." Thus, the R&D activity carried out by this company is meant for creating tools for its internal use and is not done as a service to its customers, as the assessee in question is doing. In view of the fact that this company has also income from software products and is not engaged in rendering research and development software services, we hold that this company was rightly excluded. 74. Having dealt with the inclusions or exclusions challenged by the assessee in the international transaction of 'Provision of software development services', we, now take up other points urged by the assessee in its appeal. 75. The ld. AR argued that the authorities below erred in not granting working capital adjustment. 76. It can be seen from page 37 of the TPO's order that the assessee's claim for working capital adjustment has been denie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses from total operating expenses for the purpose of computation of the ALP. It was further pointed out that the DRP directed the TPO in relation to the assessment year 2012-13 for allowing deduction of expenses concerning the rental income from total operating expenses. 79. Having heard both the sides and perused the relevant material on record, it is seen that the assessee did earn rental income amounting to Rs. 17,22,16,198/- apart from income from operations as charges towards Software development and IT enabled services. Once rental income has been treated as non-operating qua the international transactions, as a sequitur, the corresponding expenses incurred in relation to earning of such rental income are also required to be removed from total operating expenses for the purposes of computation of ALP of the international transactions. We, therefore, direct the TPO/A.O. to examine the amount of expenses incurred in relation to earning of rental income and reduce such amount from the total amount of operating expenses to be bifurcated in all sources of revenues from operations. PROVISION OF I.T. ENABLED SERVICES (Bangalore unit)] 80. The next international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t support team. These teams, on receiving calls from the customers, understand their requirements, verify the service contracts of the customers and prepare the support requests and forward the same to the right support teams. The support requests prepared is serviced by India GSC's support engineer as a part of its product support services. In case any specific support request is not resolved by the support engineers at India GSC, the same is escalated to specific escalation queues and handled by the escalation teams based elsewhere in the world. In certain cases, the team at India GSC acts as escalation team and handles the cases escalated by other teams. We have also gone through the Product Support Service Agreement (PSSA) effective from 01.07.2002 between the assessee and Microsoft Corporation, USA. This Agreement provides that the assessee shall provide 'Product support services', which term has been defined in clause II of the Agreement as under :- "'II. PRODUCT SUPPORT SERVICES MSFT hereby engages Subsidiary (i.e. the assessee) to render product support services specified below throughout the term of this Agreement. The product support services shall include standard M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich falls under the overall umbrella of IT enabled sector. The assessee is aggrieved by the inclusion of this company. 84. Having heard both the sides and gone through the relevant material on record, we find from the Annual report of this company, whose copy is available on page 2153 onwards of the paper book, that it is engaged in rendering KPO services. The Managing Director of this company has said in his message to the shareholders on page 6 of the Annual report that the company decided to develop its own EMR (Electronic Medical Records) software rather than depending on third party offering and market the same all over the US. It has further been mentioned that due to these developments, the company invested large amount of funds in the development of EMR software and SaaS model marketing of the same in the US. It has still further been mentioned on page 2175 of the paper book that this company supported a Product Division under the name of Iridium and with a focused approach. The product team was able to come up with end-to-end global work flow automation system that help in the day-to-day work flow. The products like Iridium Medical Transcription Automation software, Iridi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against which the assessee has come up before the Tribunal. 86. We have gone through the Annual report of this company, a copy of which is available on page 2237 of the paper book. Internal page 27 of this Annual report divulges that: 'the company is engaged in the software development and consultancy, engineering services, web development and hosting and subsequently diversifying itself into the domain of business analytics and business process outsourcing.' Under the head 'Revenue recognition', this company has recorded that: 'Revenue from services consists of revenue earned from services performed for software development and consultancy, licensing and sub-licensing fee, annual maintenance charges for software support, web development and hosting which is recognized to the extent services are performed.' Page 2284 is a copy of the Profit & Loss Account of this company which shows operating revenue of Rs. 1,58,401/- (in thousands of Indian rupees), bifurcation of which is available at page 2285. It shows revenues from sale of goods and revenue from other services separately at Rs. 949/- (in thousands of Indian rupees) and 1,57,452/- (in thousands of Indian rupees) respectively. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables drawn by the assessee on the ground that it was incurring persistent operating losses under the relevant segment considered by the assessee. The TPO has drawn a table on page 25 of his order which shows that the concerned segment is showing OP/TC at (-) 12.94%, (-) 3.79% and (-) 19.51% in respect of year ending 2011, 2010 and 2009 respectively. The assessee is aggrieved by this exclusion. 91. We have heard both the sides and perused the relevant material on record. The ld. AR contended that the TPO erred in considering persistent losses in the relevant segment by ignoring that this company was not into consistent losses on entity level. We have gone through the Annual report of this company, whose copy has been made available. On page 2524 of the paper book, there is a mention of operating revenue of this company at Rs. 16,20,426/- (in Thousands of Indian Rs.), described as 'Revenue information technology consultancy.' Segmental reporting of this company has been given on pages 2509/2510, which divulges that it has revenues from 'Infrastructure management services' and 'IT enabled services'. Note to accounts no. 16 clearly mentions that: "The company renders softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011. In that view of the matter, a valid comparison can be made only if the potential comparable company has also the same financial year. In this regard, we consider it appropriate to note the relevant part of sub-rule (4) of Rule 10B which provides that: "the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into." It is obvious from the language of sub-rule (4) that the comparability of an uncontrolled transaction can be analyzed only with the "data relating to the financial year" in which the international transaction has been entered into. In other words, if the tested party has March year ending, then, the comparables must also have the data relating to the financial year ending 31st March itself. If such a data is not available, then, a company albeit functionally comparable, disqualifies. Espousing the facts of the extant case, we find that insofar as the functional comparability of this company on segmental level is concerned, the TPO has not disputed the same. The only reason assigned for its exclusion is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted. 95. We have gone through the Annual report of this company, a copy of which is placed in the paper book. Its income from operation has been divided into two segments, namely, 'Business process outsourcing (BPO)' and 'Others'. Only the BPO segment of this company has been considered by the assessee as comparable. The only reason assigned by the TPO for excluding the BPO segment of this company is that its figures for the year ending 31st March, 2011 are not available. But for that, the functional comparability has not been challenged. We have discussed above the case of M/s R. Systems in which the TPO made exclusion only on the ground that its year ending was different from that of the assessee. The same has been disposed with some directions. Our observations made above in the context of M/s R. Systems apply to this company on segmental level as well. The TPO is directed to decide the inclusion or otherwise of this company in the light of the discussion made while dealing with M/s R. Systems Ltd. under the instant international transaction of rendering IT enabled services. (iii) Informed Technology; (v) Micro Genetics Systems Ltd.; and (vi) CGVak Software and Exports Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is abnormally higher. There can be no justifiable reason to exclude such high or low profit companies unless it is shown that such high or low profit was due to abnormal factors. Same logic applies to the high or low turnover companies also. The mere fact that a company has a high or low turnover can be no reason to justify its exclusion if it is otherwise functionally comparable. The exclusion of companies on such a rationale runs contrary to the express provisions of the Act. The Hon'ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT (2015) 376 ITR 183 (Del) has also laid down to the same effect. We, therefore, direct to include Informed Technology; Micro Genetics Systems Ltd.; and CG-Vak Software and Exports Ltd. (Seg.) in the list of comparables. 98. Having considered the companies challenged by the assessee from the angle of comparability, we now take up the assessee's contention for grant of working capital adjustment and also allowing reduction of expenses in relation to rental income from total operating expenses in the computation of its PLI. The arguments advanced by both the sides on these issues remain the same as were qua the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in B.C. Management Services (supra), has also reiterated that E-Clerx is not comparable to an assessee providing IT enabled services. In view of the foregoing discussion, we are satisfied that the DRP was justified in ordering the exclusion of E-Clerx from the list of comparables drawn by the TPO under this segment. 102. To sum up, we set aside the impugned order on the issue of transfer pricing additions in the above referred two international transactions of 'Provision of Software development services' and 'Provision of IT Enabled services' and remit the matter to the file of AO/TPO for fresh determination of their ALP in consonance with our above observations/directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. 103. Now, we take up corporate tax grounds raised by the assessee. 104. Ground no. 16 is against the addition towards realized foreign exchange fluctuation gain/loss and ground no. 17 is against the adjustment of Rs. 13,40,482/- against the opening written down value of computers towards unrealized foreign exchange fluctuation gain arising out of restatement of liability u/s 43A of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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