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TMI Blog2018 (4) TMI 1759X X X X Extracts X X X X X X X X Extracts X X X X ..... against the very same order. The CrossObjection is partly supportive of the order of the DRP. 2. The Assessee is a wholly owned subsidiary of EMC Corporation, USA. The Assessee is engaged in the business of providing contract software development services(SWD Services) and Information Technology Enabled Services (ITES) and marketing support services to its Associated Enterprises (AE). In the appeal by the revenue and the C.O. by the Assessee the disputes relate to determination of Arm s Length Price (ALP) in respect of provision of SWD services and ITES to the AE. 3. SOFTWARE DEVELOPMENT SERVICES SEGMENT: Grounds No. 1 to 6 raised by the revenue relate to the addition made consequent to determination of Transfer Price by the Transfer Pricing Officer(TPO) in the SWD Services segment, which addition was deleted by the DRP in its directions on the adjustment to Arm s Length Price (ALP) suggested by the TPO. We have already seen that during the relevant previous year, one of the international transactions that took place between the Assessee and its AEs was the provision of software development services ( SWD services for short) to them at a price of ₹ 223,06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimately chose by the TPO and the arithmetic mean of the profit margin of those companies. Name of the Company Mark-up on total Costs (WC-unadj) Mark-up on Total Costs (WC-adj) (in %) Acropetal Technologies Ltd. (seg) 31.98 28.33 E-Zest Solutions Ltd. 21.03 18.74 E-Infochips Ltd. 56.44 55.38 Evoke Technologies Pvt. Ltd. 8.11 7.91 ICRA Techno Analytics Ltd. 22.54 Infosys Ltd. 43.39 42.89 Larsen Toubro Infotech Ltd. 19.83 19.61 Mindtree Ltd.(seg) 10.66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Software Development activities: In addition to the above, the DRP rejected the following companies selected by the TPO on the basis that they were predominantly engaged in onsite activities, although no onsite revenues filter had been applied by the TPO: (a) Acropetal Technologies Ltd. (rejected by DRP on other grounds also); (b) L T Infotech Ltd. (rejected by DRPsuo moto on other grounds also); (c) RS Software (India) Ltd. (rejected by DRP suo moto only on this ground); and (d) Mindtree Ltd. (rejected by DRP suo moto on other grounds also) List of Comparables post the DRP s Directions: On giving effect to the above directions issued by the DRP, the final list of comparables is as follows: Sl. No. Name of the Company 1. e-Zest Solutions Limited 2. Persistent Systems Solutions Ltd. 3. Persistent Systems Ltd. 4. Sasken Communication Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able and it was not possible to ascertain if it passed the export earnings and / or employee costs filters; and (ii) a substantial portion of its software development activities have been outsourced on sub-contract and it could, therefore, not be retained as a comparable. The DRP in directing exclusion of this company followed decision of Hyderbad Bench of ITATl in the case of Capital IQ Information Systems (India) Pvt. Ltd. (ITA No.1961/Hyd/2011). The DRP also observed that this company was predominantly doing on-site development of software and therefore cannot be compared with a company which develops software off-shore. One of the filters applied by the TPO was that companies where employee costs are less than 25% of turnover cannot be regarded as comparable. In the absence of segmental information, it was not possible to ascertain as to whether this company passes the test adopted by the TPO himself for comparison. The learned DR submitted that the required data can be culled out from the information available in the public domain or by resorting to a process of calling for information from this company u/s.133(6) of the Act. The learned counsel for the Assessee in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion on these grounds have attained finality and cannot be disturbed by this Hon ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that the company s software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for that year. Thus, the above action of the DRP in rejecting the above company is correct. 17. As far as Ground No. 1 2 in the Revenue s appeal is concerned, the revenue in this ground has challenged the order of the DRP on the ground that the DRP suo moto introduced a new filter i.e. onsite software development filter and thereby rejected companies on the basis that they were predominantly engaged in the onsite development of software in FY 2010-11. 18. In this regard, we are of the view that On-site revenue filter is an accepted filter to be applied for choosing comparable companies engaged in software development and falls within the parameters of Rule 10B(2) of the Income Tax Rules, 1961 (Rules). In any event, the three companies whose exclusion from the list of comparable companies is challenged before the Tribunal, go out of comparability for other reasons and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd., as a comparable company. The submissions of the ld DR was that the Acropetal Technologies Ltd., satisfies all the qualitative and quantitative filters adopted by the TPO. Despite that the DRP excluded this company from the list of comparable companies for the reason that this company was engaged in diverse activities for which no segmental information is available. The DRP also held that there was unallocated expenses to the extent of ₹ 21.52 crores and, therefore came to the conclusion that this company may not be functionally comparable with that of the assessee. The DRP had relied on the decision of Bangalore ITAT in the case of Symhpony Marketing Solutions India Pvt. Ltd., Vs. ITO, in IT(TP)A No.1316/Bang/2012, wherein the ITAT took the view that this company performs engineering designs services and therefore not comparable with the ITES company. 25. The ld DR submitted that segmental revenue of this company is available at page 554 of the assessee s paper book and it reads as follows:- Business Segment Engineering Design Service Information Technology Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted to deliver the cost effective software products, services and solutions to its customers for which no segmental information is available. It is also noticed that in the profit and loss a/c, software development expenses of 7 69.92 crore has been debited out of which RS. 55.77 crore has been incurred on technical sub contract. In respect of such on-site expense, segmental information is not available, Further, in the segmental information, the unallocated expenses are to the extent of ₹ 21,52 crore. All these differences makes it clear that even if the engineering design segment is considered as comparable, the correct margin and comparability cannot be arrived at, Further, due to the functional differences, Hon'ble Bengaluru ITAT in the case of - Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (IT (TP) A No. 1316/Bang/2012), held that Acropetal cannot be considered as comparable as it performs engineering design services in addition to other judicial pronouncements relied by the assessee, accordingly we direct the assessing officer to exclude the company from the comparables . 28. The fact that segmental details are not available is not the only reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... care industry and their products were customised and not similar to what assessee was doing. As per the Ld. AR the work done by Accentia Technologies Ltd, required skilled knowledge and advanced analytics. Ld. AR submitted that during the relevant previous year, the said company had invested in another company which had an expertise in EMR Software and Saas. In any case, as per the Ld. AR, segmental results of Accentia was not available in between various segments like MT billing collection and coding. When segmental results were not available, as per the Ld. AR it was not proper to consider Accentia Technologies Ltd, as a good comparable. Reliance was also placed on decision of Delhi Bench of the Tribunal in the case of Equant Solutions India P. Ltd v. DCIT [ITA.1202/Del/2015, dt.21.01.2016] and that of coordinate bench in the case of Amba Research (India) P. Ltd, v. DCIT [IT(TP)A.286/Bang/2015, dt.09.03.2016]. As per the Ld. AR though the above decisions were for A. Y. 2010-11, Accentia Technologies Ltd, was doing the very same activities during the relevant previous year also. Hence according to him these decisions could be taken as a precedence for excluding the said company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained in detail at pages 24 and 25 of annual report. This is reproduced hereunder : 14. If we have a look at the billings made by M/s. Accentia Technologies Ltd, its income for the relevant previous year read as under : Not only was the medical transcription work done by it of a highend variety, it also had substantial income from coding coming to about 16% gross receipts. No segmental results were also available. Its audited financial statements at para 7 of the notes to accounts mentioned as under : 15. As against the above, Assessee was providing back office support to its group companies and affiliates, in the field of reinsurance, which its affiliates were engaged in. Work done by the assessee has been captured by us at para three above. This in our opinion was entirely different from the type of activities that Accentia Technologies Ltd, was into. Type of services rendered by the assessee is also clear from the service agreement entered with its AE called Swiss Re, Zurich, dt.01.02.2009. Annexure-1 to this agreement, is reproduced hereunder : 16.A reading of the above would sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be erroneous. 18. Thus when characteristics of services rendered were dissimilar and the competence required to operate the services were different, it will not be correct to compare the results of two companies. 19. In the case of Amba Research India P. Ltd (supra), this Tribunal had directed exclusion of Accentia Technologies Ltd, for comparison purposes. Assessee in the said case was providing ITES services to its holding company at British Virgin Islands. Observation of the Tribunal at para 8 of the order dt.09.03.2016, is reproduced hereunder : 08. We have perused the orders and heard the rival contentions. No doubt Accentia Technologies Ltd, formed a part of the list of comparables considered by the assessee in its TP study. However assessee had objected to its inclusion citing functional dissimilarity before the AO as well as the DRP. Question regarding comparability of Accentia Technologies in the ITE segment for A. Y. 2010-11 had come up before this Tribunal in the case of Novo Nordisk India P. Ltd (supra). It was held as under at paras 31 and 32 of the order dt.30.07.2015 : 31. We deal with the comparable companies which the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad (supra), being relevant in this case, are reproduced below- 19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of IT(TP)A No.146/Bang/2015 Page 42 of 52 the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected. 13. As pointed out by the learned counsel for the assessee, there was acquisition of a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amalgamating company were incorporated in the amgalamated company. As far as Infosys BPO Ltd., is concerned, the observations made by the Tribunal in the decision referred in the earlier paragraph will hold good for the present AY 2010-11 also. Respectfully following the decision of the Tribunal referred to above, we direct that the aforesaid 2 companies be excluded from the list of comparable companies for the purpose of computing arithmetic mean for comparability purpose. The TPO is directed to give effect accordingly. Even after exclusion of Accentia Technologies Ltd, along with the exclusion of four comparable companies directed by DRP, there will be four companies left in the list of comparables which, in our opinion, cannot be considered as too small a sample for an effective TP study. In the circumstances, we direct exclusion of Accentia Technologies Ltd also from the list of comparables. Ordered accordingly. 20. No doubt the said decision was for A. Y. 2010-11, but the conditions which prevailed in the said previous year more or less existed in the impugned assessment year also. Considering all these aspects, we are therefore of the opinion that Acce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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