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TMI Blog2019 (4) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the margin earned by Helios Mathesan is totally different in comparison to the FAR of the assessee. It is therefore, directed that Helios Mathesan be excluded from final list of comparable companies. Ishirinfotech Limited - company failed the 25% employee cost filter based on data available in Capitoline database - Employee cost details are shown separately under schedule 15 to the financials. The company recognizes income by application of percentage of completion method unlike cost plus mark-up basis of compensation applicable to captive service providers like the present assessee. Thus, it appears that in addition to this company not qualifying the employee cost filter applied by the TPO, the FAR of Ishirinfotech Limited is different compared to that of Kaplan India Private Limited. Reference to the chart filed by the Ld. AR during the hearing indicates that other coordinate benches, details of which are mentioned in the chart, also concluded that Ishirinfotech Limited is not a valid comparable for AY 2007-08 for software development services segment. Accordingly, we direct exclusion of this company from the final set of comparable companies. Megasoft Ltd - the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eep S. Karhail, Adv. Shri Parth, Adv. For the Department : Shri Sandeep Kumar Mishra, Sr DR ORDER PER SUDHANSHU SRIVASTAVA, J.M. This appeal has been preferred by the assessee against the order of the Ld. CIT (Appeals)-XX, New Delhi vide order dated 28.02.2014 and pertains to assessment year 2007-08. 2.0 The brief facts of the case are that the assessee Kaplan India Private Limited (KIPL) was incorporated in April 2005 as a subsidiary of Kaplan Mexico Holdings LLC. KIPL is engaged in providing software development and maintenance services to its Associated Enterprise (AE). During the Assessment Year (AY) 2007-08, the assessee entered into international transaction of provision of software development services for ₹ 8,80,32,063/- which were explained as follows: Undertaking coding and documentation that enhance the functionality of existing software applications being used by the AEs. Also undertakes database cleanup and software maintenance services, supporting applications and platforms within Kaplan businesses, bug fixing and maintenance etc., and Undertaking functional test and other test for various software development activities perfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ( the Rules ). 5. The TPO / AO / CIT (A) has erred, by rejecting the filters applied by the Appellant, and applying additional filters which are incorrect, wrong and baseless. 6. The learned TPO/ Assessing Officer/ CIT (A) have erred in selecting certain companies (which are earning super normal profits) as comparable to the Appellant. 7. The TPO/AO/CIT (A) has erred, in law by exercising his powers under section 133(6)/131 to obtain selective information which was not available in the public domain and relying on the same for comparability analysis. Without Prejudice to the above, the information collected by the AO/TPO U/s 133(6) or U/s 131 has not been provided to the appellant although the same has been used against the appellant, hence the addition I adjustment made on that basis is illegal and bad in law. 8. The learned TPO / AO / CIT(A) have erred in erroneously rejecting the comparable companies selected by the Appellant and adding certain companies to the final set of comparables on an ad-hoc basis, thereby resorti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dd, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. 3.0 The learned counsel for the assessee (AR) made submissions in support of Grounds of Appeal nos. 7, 8 and 9 objecting to the inclusion and exclusion of companies as comparable and contested the transfer pricing adjustment made by the TPO as also in support of Ground of Appeal no 13 relating to the disallowance of expenditure towards group medical insurance. 3.1 The other grounds of appeal viz., Ground nos. 1 to 6, 11, 14 and 15 are general in nature and do not require any separate adjudication. 3.2 Ground nos. 10 and 12 were not pressed by the Ld. AR and Ground no 16 is consequential. 3.3 Ground no 17 objecting initiation of penalty proceedings is premature at this stage. 3.4 The Ld. AR submitted that the assessee is a captive software developer providing computer programming, applications, development and other support and technical services. DF Institute Inc. is a group subsidiary of the company and provides high-end customized education training solutions for the institutional and corporate customers in finance, technical prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aft Assessment Order, the assessee filed Appeal before the Ld. Commissioner of Income Tax (Appeals) {CIT (A)} inter alia challenging the rejection of the Transfer pricing study, rejection of all the comparables, selection of new set of comparables, use of information obtained under section 133(6) and disallowance of expenditure towards Group insurance of employees. The Ld. AR submitted that the Ld. CIT (A) upheld the rejection of the TP study and its comparables, directed exclusion of the comparable Celestial Labs from set of comparables chosen by the TPO on the ground that it is engaged in development and sale of products AND directed exclusion of the comparables Infosys Limited and Wipro Limited from set of comparables chosen by the TPO relying on decision of the Hon ble Delhi High Court in the case of Agnity India. The Ld. AR further elaborated that the Ld. CIT(A) upheld all other conclusions of the TPO as also the disallowance made by the AO towards Group insurance on the ground that no evidence was produced to show that the scheme of insurance issued by ICICI Lombard is approved under section 36(1)(ib). 3.8 Before us, the learned counsel for the assessee mainly sought exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproved under section 36 (1) (ib) of the Act. 5.0 We have considered the rival contentions and have also perused the orders of the TPO and the Ld. CIT (A). In the context of the transfer pricing adjustment, dispute is mainly centred around the exclusion and inclusion of some companies as comparables. While prima facie , the Ld. Sr. DR s contention that coordinate bench decisions should not be blindly followed cannot be faulted, well-reasoned orders of coordinate benches of the Tribunal for very same assessment year 07-08, more so dealing with Software development services segment deserve respectful consideration and cannot be lightly ignored unless factual differences or developments in law which have a bearing on the issue in dispute are pointed out. This is more so when in the present case, broad characterisation of international transactions as Software development services and application of TNMM as the most appropriate method is not disputed by both the parties. As rightly pointed out by the Ld. Counsel for the assessee, the decisions of the coordinate benches have considered issues arising from the very same set of 26 comparables in AY 07-08. In such factual background de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s chosen by the assessee in its TP study wherein such comparables were rejected on the ground of insufficient information. The Ld. Counsel further contended that before the Ld. CIT (A) it was pointed out that this company earned revenue from software product sale (software named D Xchange). However, the Ld. CIT (A) rejected the objections at Para 4.7 by holding that the case laws relied on by the assessee are not applicable. The Ld. Counsel invited out attention to Para 90 of the decision in case of Motorola Solutions India Private Limited ( ITA no 5637/Del/2011) and Para 18-19 of decision in NXP Semi Conductors India Private Limited ( ITA 1174/Bang/2011). In response, by reference to the Annual report of this company, which was filed at the time of hearing at pages 1 to 17 of the paper book containing annual reports, the Ld. Sr. DR contended that there is nothing in the financials of the company to indicate that the company has earned any revenue from sale of products. The Ld. Sr. DR also contended that this company was included on the basis of section 133 (6) information. Having heard both the parties on this comparable, firstly, we notice from the order of the TPO that unl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be compared with Kaplan India which earns its revenue purely from software development services. The Ld. Counsel invited our attention to Schedule I of the Annual Report at page 83 of the Annual Reports paper book to contend that the income was earned from software sales services, by reference to Scheduled M it was contended that Helios Matheson incurred Advertisement expenditure unlike the assessee. By reference to page 93 of the Annual report paper book it was submitted that for Helios Matheson global brand building was a focus area and that the same impacts the Margin earned by this company. The Ld. Counsel also drew our attention to several decisions of the coordinate benches for AY 2007-08, as listed in the chart submitted at the time of hearing, and submitted that as this company was found not comparable in the context of software development services, exclusion of this company was required in the present case also. The Ld. Counsel also drew our attention to application dated 30.4.2014 filed before Ld. CIT (A) seeking rectification of the order on this comparable. It was submitted that such rectification application was still pending consideration. The Ld. Sr. DR conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ITAT Bangalore Bench in the case of NXP Semi Conductors (ITA 1174/Bang/2011), wherein for this very reason the coordinate bench of the Tribunal has directed exclusion of this company from the final set of comparable companies. The Ld. Sr. DR contended against exclusion of this comparable by relying on the coordinate bench decision. It was contended that NXP was engaged in business of semiconductors and, therefore, the finding of the coordinate bench was in a different context. The Ld. counsel for the assessee clarified in this context that the decision in NXP to exclude Ishirinfotech as a comparable company was made in the context of benchmarking their software development services segment and had nothing to do with the overall business of NXP being related to Semiconductors. It was, therefore, contended on behalf of the assessee that the decision was clearly applicable in the context of software development services. We have carefully considered the rival submissions. Reference to pages 159,165 and 166 of the paper book of annual reports filed show that the entire income of this company is from professional receipts. Details of administrative expenditure marked as Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion obtained under section 133 (6) is extracted. The Ld. Counsel invited our attention to the reply received from Megasoft which is dated 14 June 2010 and wherein at paragraph 2 it is clarified in the context of Xius that the products resulting from the software development are defined and sold as packaged products to customers. It was also pointed out that the TPO has expressly noted (just above Para 13.8) that product revenue constitutes 19% of overall revenue to the company. The Ld. Counsel, therefore, urged that this company should be excluded from the final set of comparables. The Ld. Counsel also relied on Para 22 23 of the coordinate bench s decision in NXP semiconductors (ITA 1174/Bang/2011) wherein for identical reasons this comparable was found to be not comparable to the software development services segment for AY 2007-08. The Ld. Sr. DR submitted that Blue ally and Xius were not products in themselves but were only segments which engaged in software development service. Further, it was submitted that the extraordinary event of amalgamation also cannot be a reason to exclude this company from the set of comparable companies unless taxpayer could demonstrate that su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred advertising and sales promotion expenses as also paid commission on sales. According to the Ld. Counsel for the assessee the FAR profile of this company is vastly different from that of a captive service provider like the assessee. This is further corroborated by point numbers 6 and 8 under schedule 15, schedule to the financial statements, wherein the policy for recognizing revenue from sales and accounting for research and development costs are set out. The Ld. Counsel drew our attention to the findings of the coordinate benches in Motorola and NXP Semiconductor cases (supra) at paragraphs 112, 113 and Paragraph 24 respectively, wherein the coordinate benches have concluded that this company is not comparable to captive software development service segment. The Ld. Sr. DR argued that incurring of research and development was common for companies engaged in software development services and that such research does not make a company non-comparable to the companies engaged in software development services. The Ld. Sr. DR drew our attention to the information collected under section 133 (6) as extracted in TPO s order under Para 13.25 and argued that 87.45 % of revenues f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umption of the TPO was incorrect. Ld. Counsel relied on Para 37 of the Coordinate bench s decision in NXP Semi Conductors (supra) wherein the coordinate bench had remanded VMF Infotech to the TPO for fresh consideration taking into account all available information. The Ld. Counsel prayed for similar relief and for consideration of these companies for inclusion on merits. 5.7 We notice that the Ld. DRP also upheld the conclusions of the TPO without citing any reasons. The Ld. Sr. DR also did not point out any specific reasons to support the exclusion of these companies from the final list of comparable companies. Accordingly, it is directed that the TPO/AO will decide the issue of inclusion of these companies afresh after giving an opportunity of being heard to the assessee and considering all material placed before him for consideration. 5.7 Thus, we direct the TPO/AO to re-determine the arm s length price of international transaction of software development services in case of Kaplan India Private limited after excluding Avanicincom Technologies Limited, Helios Matheson Limited, Ishirinfotech Limited, Megasoft Limited and Tata Elxsi Ltd. from the final list of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X
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