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TMI Blog2019 (5) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... business of Software products but is also providing on-site services, which make it distinguishable from the assessee company. We, therefore, order to exclude this company from the list of comparables. Companies providing on-site services cannot be considered as comparable. Direction of the DRP to include certain companies which were initially not included by the assessee in its list of comparables because the relevant financial data was not available - As in CIT Vs. Reuters India Pvt. Ltd. [ 2016 (5) TMI 796 - BOMBAY HIGH COURT] has held that there can be no estoppel in pointing out the correct facts before the appellate authorities particularly when all facts are on record. No reason to interfere with the direction given by the DRP on this count in so far as the objection of the Revenue is concerned. The ld. DRP has simply directed to examine the comparability of these companies and did not, at the threshold, throw the assessee out simply on the reasoning that the relevant information was filed in respect of these companies only during the course of proceedings before the TPO. In view of the foregoing discussion, we are satisfied that the direction given by the DRP cannot be int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order dated 26-02-2015 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C (13) of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2010-11. 2. There is a delay of one day in the filing of the appeal by the Revenue. The ld. AR did not object to the condonation of the delay. Resultantly, the delay in condoned and the appeal is admitted for disposal. 3. The ld. AR did not press ground no. 1 concerning deduction u/s 10A and ground no. 4 regarding the treatment of foreign exchange loss/ gain. These grounds are, therefore, dismissed as not pressed. 4. The first effective issue raised in the assessee's appeal is against the addition on account of transfer pricing addition amounting to ₹ 6,37,64,290/- made in respect of international transaction of "Provision of Software Development Services" by the assessee to its Associated Enterprise (AE). 5. Briefly stated, the facts of the case are that the assessee, an Indian company, is engaged in providing Software Development Services and Sales Support Services to Deere and Company, USA and other group entities. The assessee filed its return declaring total income of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Product support. The overall functions performed by the assessee and Deere & Company in rendering software development services have been summed up at pages 3 and 4 of the TPO's order. The conceptualization and design of the software is done by the Deere & Company. The assessee has a very limited role in overall designing of the software. Functional specifications and requirement analysis of the software is also done by Deere & Company, which is then communicated to the assessee and the assessee's role in this function is also very limited. Thereafter, starts the role of the assessee with Development of codes and documentation; Testing and Quality Control. When the Software Developed by the assessee is passed over to Deere & Company, the same is integrated by the Deere & Company into the big overall Software developed by the latter. The assessee entered into Services agreement with Deere & Company on 26.5.2005, which is valid for the year under consideration as well. This Agreement provides that the assessee will render, inter alia, the Information Technology Services for John Deere business applications. The services include the development and support of the applications use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Expenses", an item of ₹ 11,00,000/- has been shown with narration of "Software Consumption from Inventory". Balance sheet of this company shows `Inventories' at ₹ 60,47,977/-. The above information clearly deciphers that Kals Information Technology Systems Ltd. is not only engaged in providing Software Development Services but is also dealing in Software products under the relevant segment. As the assessee is not engaged in the business of Software products but is rendering only Software services on captive basis, in our considered opinion, this company cannot be considered as comparable. The Hon'ble jurisdictional High Court in CIT vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 0176 (Bom) has held that a Software product company cannot be compared with a company providing software services. As Kals Information Technology Systems Ltd. was engaged in selling of software products which was different from activity undertaken by assessee in that case, namely, rendering of software service to its holding company, the same was held to be rightly excluded from the list of comparables. In view of the foregoing discussion, we order to exclude this company from the final list o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company as comparable. The assessee is aggrieved by this direction of the DRP incorporated in the final assessment order. 12. Having heard both the sides and gone through the relevant material on record, we find that the Annual report of this company is available at page 353 onwards of the paper book. Information regarding segmental reporting has been given at pages 376 and 377 of the paper book. There are only three segments, namely, (a) Engineering Design Services, (b) Information Technology Services and (c) Health care. Pursuant to the direction of the DRP, the TPO has included only Information Technology Services segment in the final set of comparables. Directors' report of this company records that "the company is uniquely placed with readymade Software products to cater to the needs of Hospitals and Healthcare Centres both in India and abroad especially in the USA". Profit and Loss account of this company appears at page 367 of the paper book, which records `Decrease in Inventories' by (Rs.1,50,80,060/-) under the head "Expenditure". Balance sheet of this company also has a figure of `Inventories'. Apart from this company being engaged in Software products also, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es considered by the Pune Bench in the aforenoted order which were held to be not comparable. Respectfully following the precedent and adopting our reasoning given above while dealing with Acropetal Technologies Ltd., we overturn the impugned order on this score and direct that such companies providing on-site services cannot be considered as comparable. The departmental ground is allowed. 15. Vide Ground No.2, the Revenue has objected to the direction of the DRP to include certain companies which were initially not included by the assessee in its list of comparables because the relevant financial data was not available. However, during the course of proceedings before the TPO, the assessee could lay its hands on the data and came up with contention to include them in the list of comparables, which was not acceded to by the TPO. Here it is pertinent to mention that similar companies are appearing in other segments of the assessee as well. The DRP directed the AO to examine as to whether such companies including three in the extant segment, namely, (a) E-Zest Solutions Ltd. (b) Evoke Technologies Pvt. and (c) Maveric Systems Ltd. were part of accept-reject matrix of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 wrongly 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 wrongly included. Similar view has been later on taken by the Hon'ble Bombay High Court in CIT Vs. Tata Power Solar Systems Ltd. (2017) 298 CTR 0197 (Bom) holding that a party is not barred in law from withdrawing from its list of comparables, a company included on account of mistake. This ratio also applies in the reverse direction, that is, where the assessee wrongly excluded a good comparable from the list of comparables and then pleads for its inclusion in the final list of comparables. The Hon'ble Jurisdictional High Court in CIT Vs. Reuters India Pvt. Ltd. 288 CTR 741 (Bom.) has held that there can be no estoppel in pointing out the correct facts before the appellate authorities particularly when all facts are on record. In view of the foregoing discussion, we do not find any reason to interfere with the direction given by the DRP on this count in so far as the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon'ble Delhi High Court held Infosys to be not comparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the extant assessee is also a service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt that Infosys Technologies Ltd. is incomparable to the assessee company. Respectfully following the judgment of the Hon'ble Delhi High Court in Agnity India (supra), we hold that Infosys Technologies Ltd. cannot be treated as comparable with the assessee company and the ld. DRP was justified in directing its exclusion. 20. Ground no.5 of the Revenue's appeal is against the direction of the DRP to the AO for allocating unallocable expenses to each segment in proportion to segmental turnover to total turnover. 21. The facts of this ground are that the TPO included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture on the basis of sales or gross revenue from such varied divisions, will give skewed results of segment profitability. Similarly, contribution of various segments to other items of expenses varies depending upon the nature of transaction, extent of capital employed and labour required etc. etc. So all common expenses cannot be apportioned in the universal ratio of sales or gross revenue from different segments, each having its own separate features and characteristics. One can logically make allocation depending upon the nature of expenses and appropriate allocation key. As the assessee is not aggrieved by the otherwise inclusion of such companies on the ground of allocation of unallocated expenses, we set aside the impugned order and direct the AO/TPO to allocate common unallocated expenses on the basis of relevant keys as the case may be after allowing an opportunity of hearing to the assessee. DESIGN ENGINEERING SEGMENT : 24. The assessee, through ground no. 3 of its appeal, is aggrieved by the transfer pricing addition of ₹ 21,31,640/- in respect of international transaction of Design Engineering and Testing Services provided by the assessee company to its AE . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this aspect while dealing with Software development services segment of the assessee. The same view is followed here also. BUSINESS SUPPORT SERVICES SEGMENT : 29. The assessee reported, inter alia, the international transaction of "Provision of Business Support Services" to Deere & Company with transacted value of ₹ 8,81,33,662/-. The TNM method was applied for exhibiting that this transaction was at ALP. The TPO considered 7 companies, including Asian Business Exhibition and Conference Ltd., as comparable, which have been listed at page 47 of his order. The assessee's objection that Asian Business Exhibition and Conference Ltd. was functionally different did not find favour with the TPO who held that this company is engaged in a single segment, i.e. Exhibitions and Event Management and hence, comparable. On the basis of their overall operating margin of 24.13%, the TPO recommended a transfer pricing adjustment of ₹ 89,85,865/-. The AO passed the order making the above addition. The ld. DRP gave certain directions, including the exclusion of Asian Business Exhibition and Conference Ltd. from the list of comparables by observing that it was engaged only in organiza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company has been placed at page 514 of the paper book, which shows "Direct Income" of ₹ 53,18,30,655/-. Bifurcation of the income has been given in Schedule 12 which reveals that the Revenue from "Exhibitions and Events" is ₹ 50,94,41,029/-; `Delegate Fee' is ₹ 7,000/-; `Sponsorship/Promotional Charges' are ₹ 88,67,639/-; `Miscellaneous Receipts' are ₹ 7,57,747/- and `Entry Charges' are ₹ 1,27,57,240/-. It is obvious from the bifurcation of the `Direct Income' that the entire income pertains to Exhibitions and Events as has also been accepted by the TPO in his order. The revenue recognition of this company has been given on page 523 of the paper book, which mentions that it is earning revenue from sale of stall space in exhibitions and events. On going through the functional profile of this company, it becomes explicitly clear that it is nowhere close to the assessee's activities under this segment, which are confined to maintenance/updation of suppliers record and providing pay roll services etc. In our considered opinion, the ld. DRP was fully justified in directing to exclude this company from the list of comparables. 32. Other grou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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