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TMI Blog2019 (10) TMI 1241X X X X Extracts X X X X X X X X Extracts X X X X ..... ce located in Mumbai and different business divisions in Bangalore, Pune etc. thus companies functionally dissimilar with that of assessee need to be deselected from final list. Working capital adjustment - Entire workings of working capital adjustment had been furnished before the ld. TPO by the assessee which are enclosed in page 300 of the paper book. Hence, the ld. TPO ought to have considered the same on the list of comparables chosen by him while determining the ALP of the international transactions. Hence, we hold that the ld. CIT(A) had rightly directed the ld. TPO to grant working capital adjustment on the final set of comparables pursuant to the order of the ld CIT(A). Service tax refund for the eligible unit for the purpose of claiming deduction u/s.10A - HELD THAT:- It is not in dispute that service tax was paid by the assessee in earlier years for these eligible units and claimed as deduction, pursuant to which the claim of deduction u/s.10A of the Act had indeed been reduced to that extent. When the said service tax had been refunded to the assessee during the year under consideration, and also in view of the fact that the said eligible unit still continues for claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses proportionately for units claiming exemption u/s 10A / 10B, on the basis of the turnover of the units. According to the AO, the assessee has parked its head office expenses for the units generating taxable income without any valid reasons for not allocating expense to the units claiming exemption u/s 10A / 10B. The assessee claims that head office expenditure in no way connected to the units claiming exemption u/s 10A / 10B and the units are functioning independently. Therefore, the AO was incorrect in allocating head office expenses to the units claiming exemption u/s 10A / 10B. We do not find any merits in the arguments of the assessee for the reason that on perusal of the details of expenditure incurred by the assessee it is difficult to accept explanation of the assessee that head office expenditure has no relevance to the units claiming exemption u/s 10A / 10B. The assessee is having four units based at various locations which were controlled through its headquarter. The expenditure incurred by head office like travel and conveyance, communication expenses, legal and professional charges and rates and taxes definitely is having relevance to its total business. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmarking assessee's international transaction of provision of software development services segment even though these companies are functionally comparables to the software development services provided by the assessee?" (iii) "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to grant working capital adjustment to the assessee?" (iv) "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not adjudicating on the functional comparability M/s Teledata Marine Solutions Ltd. (software development & sales segment) with the software development service segement of the assessee and also erred in not directing the TPO to exclude it from the final set of comparables ignoring the fact that said company has line of products and also segmental profitability is not available on standalone basis. Applying same qualitative filters, the Ld. CIT(A) has directing to exclude few companies such as M/s Kals, M/s Thirdware Solutions on the ground that these are engaged in development of software products and segmental profitability is not available?". (v) "Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware development segment was 8.03% which was worked out as under:- Particulars Rs. Operating Income (A) 22,29,12,328 Less: Operating expenses 20,83,41,962 Operating Profit (OP) (B) 1,65,70,366 OP/TC (B)/(A) 8.03% 5.3. The arm's length price of the international transactions representing software services provided to the AEs was determined by applying the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The operating profit to total cost ratio was considered as the Profit Level Indicator (PLI) in TNMM analysis. The assessee in its benchmarking analysis considered certain comparables engaged in the similar segment and arrived at the average PLI of the comparables at 13.18%. The assessee pleaded that since the price charged in its international transactions in respect of software segment was within the +/-5% band, the price charged by the assessee was claimed to be at arm's length. The ld. TPO observed that the PLI of the comparables was arrived by the assessee by considering the weighted average margin of two years data for the F.Yrs. 2007-08 and 2008-09. The ld. TPO, among other filters, adopted turn over filter to eliminate com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Sasken Communication Technologies Ltd. 19.42 6 Synetairos Technologies Ltd. 18.02 7 Zensar Obt Technologies Ltd. 19.87 8 Teledata Marine Solutions Ltd., - Software development & sales -2.98 9 Thirdware solutions Ltd. 33.93 10 Infosys Ltd. 45.01 11 Sonata software Ltd 35.32 12 Thinksoft Global Services Ltd., 17.67 13 Larsen and Toubro Infotech limited 19.08 14 Persistent Systems Ltd 29.36 15 Wipro Ltd. 27.34 16 Tata Elxsi Ltd. 18.55 17 Bodhtree Consulting Ltd. 33.42 18 Kals Information Systems Ltd. 19.89 Total 409.91 Mean 22.77 5.4. The ld. TPO made an adjustment of ₹ 3,05,36,495/- in respect of software development segment by working out as under:- Particulars Emerson Electric P&L of software development segment (as per TP study report) Arm's length P&L (as per final set of comparable companies Income from software development activities 22,29,12,328 25,36,76,808 Total Cost (TC) 20,63,41,962 20,63,41,962 Operating Profit (OP) 1,65,70,366 4,73,34,846 OP/TC 8.03 22.77 Adjustment 3,05,36,495 6. Before the ld. CIT(A), assessee objected to rejection of its economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imes (ii) L&T Ltd ₹ 1,776 crores 81 times (iii) Wipro Ltd ₹ 22,920 crores 1,041 times 7.13.7 The reliance placed by the Appellant on the Hon'ble Bombay High Court's decision in the case of Pentair Water India Pvt Ltd (supra) has been examined. I find that the Hon'ble Bombay High Court has upheld the Tribunal decision stating as follows: "(7) HCL Comnet Si/stems & Services Ltd :- We find force in the submission of the Id. AR that this company cannot be a comparable as the turnover of this company is 260.18 crores while in the case of the Assesses, the turnover is around ₹ 11 crores only. While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of ₹ 11 crores cannot be compared with a company which is having turnover ofR$.260 crores which is more than 23 times the turnover of the Assessee. This company cannot be regarded to be in equal size to the Asseessee. We, accordingly, direct the AO to exclude this company out of the comparables. (ii) Infosys BPO Ltd. :- In this case also we noted the turnover in respect of this Company is ₹ 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant is a limited risk software development services provider, primarily engaged in rendering services to its AEs, whereas Infosys Ltd and Wipro Ltd are operating their business as full-fledged entrepreneurs. 7.13.13 It is noted from page 18 of the annual report of Infosys Ltd that the company offers business solutions that span the entire software lifecycle encompassing technical consulting, design, development, reengineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. Further, from the annual report (page18), it is observed that Infosys Ltd also offers software products for banking industry and has developed in-house software products such as Finacle. It is brought to attention that the Appellant does not own intangibles nor does it invest in any R&D activities. 7.13.14 Similarly, as highlighted by the Appellant, it is observed from page 57 of annual report of Wipro Ltd that the company is engaged in diversified services such as technology infrastructure services, testing services, BPO, product engineering services etc. 7.13.15 Under these circumstances, I find that Infosys Ltd and Wip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the AFs. 7.13.51 Further, the Appellant has submitted that Thirdware is engaged in developing a software product 'PAPA' since July 2009 which evidences that the company is engaged in substantial research and development activities and is diversifying into development and sale of software product unlike the Appellant. The Appellant has relied on the Hon'ble Pune Tribunal decision in the case of Approva Systems Pvt Ltd (TTA No. 1788 & 1803/PNJ/2013) in support of its arguments to exclude Thirdware as being functionally not comparable 7.13.52 The submissions of the Appellant has been examined. It. is observed from page 56 of the annual report that Thirdware i engaged in software product development. Therefore, I find force in the argument that Thirdware is not functionally comparable to the Appellant. Further, the Hon'ble Pune Tribunal decision in case of Approva Systems Pvt Ltd (supra) has been examined and it is observed that the Hon'ble Tribunal decision in Hyderabad Tribunil decision in the case of Intoto Software India Pvt Ltd V ACIT has held that Thirdware is not comparable The relevant extracts from the decision is reproduced below. From the var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h information Thirdware's revenue from software service is only ₹ 51 crores and therefore is not comparable to the Appellant. The Hon'ble Delhi Tribunal decision in the case of Sun Life India Service Centre Pvt. Ltd (supra) relied on by the Appellant has been examined and it is observed that the Hon'ble Tribunal rejected Thirdware on the following grounds: "The Profit & Loss Account of this company is at page 107, which shows 'Sales & Other income'. Bifurcation of 'Sales / is available as per Schedule 12, which comprises of 'Sale of licence' amounting to ₹ 39.16 lac, "Software services' amounting to ₹ 7.67 crore, 'Export from SEZ unit' amounting to ₹ 26.39 crore, 'Export from STPI unit' amounting to ₹ 16.88 crore and 'Revenue from subscription' amounting to ₹ 92.93 lac. These figures indicate that apart from the revenue from 'Software services' which is only to the tune of ₹ 7.67 crore, this company earned total gross revenue from 'Sales' to the tune of ₹ 52.27 crore including from export from SEZ/STPI units. When we consider the figures of this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions such as conceptualizing, designing, coding etc. while the Appellant which is a captive service unit of the AE performs routine functions and does not undertake functions such as conceptualization and designing. Further, the Appellant has brought to my attention on page 21 and 67 of the annual report that Persistent is engaged in diversified service in the nature of Research, usability engineering, Prototyping, Development, Testing & QA, Performance engineering, Porting, Documentation, Training, Sales support, Deployment, Technical support and Maintenance 7.13.58 The Appellant submitted that Persistent is engaged in product development and diversified activities and the annual report does not provide the segmental details of the software development service alone. Therefore, the Appellant argued that following the principle enunciated in the decision of the Mumbai Tribunal in the case of Roche Diagnostic P Ltd ('supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, Persistent cannot be considered as comparable. Further, the Appellant has also relied upon the Delhi Tribunal and Bangalore Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. I t is ordered accordingly" 7.13.60. Based on above facts and respectfully following judicial precedents, the TPO is directed to exclude Persistent from the set of comparables for the year under consideration. (iii) Tata Elxsi Ltd ('Tata Elxsi') 7.13.61 The Appellant has submitted that Tata Elxsi is engaged in two segments i.e. Software Development and Services and System Integration and therefore the TPO has erroneously considered Tata Elxsi at entity level. Further, the Appellant, referri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in pare 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 7.13.65. Further, it is also noticed that the above view of the jurisdictional Tribunal is also supported by various other Tribunal decisions. Relevant extracts from these decisions are provided below. 3DPLM Software Solutions Ltd. [IT(TP)A No. 1303/Bang/2012] "From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct development activities and considering that the Appellant is engaged in software services, Kals is to be excluded. Further, the judicial precedents relied upon by the Appellant have been examined and the relevant extracts from these decisions are provided below. TIBCO Software India Pvt. Ltd. (supra) the material relied upon by the assessee before the lower authorities, copies Of which have also been placed in the Paper Book filed before us, supports the assertions of the assessee that the said concern is engaged in development and sale of software product, etc., which is distinct from the software development services rendered by the assessee to its associated enterprise. Thus, we are inclined to uphold the plea of the assessee that the M/s Kals Information System Ltd. (applications software segment) is functionally incomparable to the assessee." Nethawk Networks India Pvt Ltd "Considering all the information available in public domain, we are of the opinion that this case cannot be considered as a good comparable. As such, the fact that the company is producing the ERP software products called Shine, the internationally proven ERP software and other soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng/2013) • OSI Systems Pvt Ltd (ITA No. 683/Hyd/2014) • Mercer Consulting (India) Pvt. Ltd (ITA No.966/Del/2014) • Agilent Technologies International Pvt. Ltd (ITA No. 1837/Del/2014) • Apigee Technologies (India) Pvt. Ltd (ITA No.870/Bang/2013) 7. Aggrieved, the revenue is in appeal before us on the grounds reproduced hereinabove. 8. We have heard the rival submissions. We find that the assessee by furnishing the single year data being the contemporaneous data for the F.Y.2009-10 and applying the said data on the set of 19 comparables chosen by it, had arrived at the mean operating margin of the comparables i.e. PLI of 8.24%, as against its operating margin of 8.03% during the year under consideration. Accordingly, the assessee had claimed that its international transaction in respect of software development segment was at arm's length. We find that there is no dispute with regard to selection of tested party and TNMM being adopted as MAM. We find that the ld. TPO had selected 8 out of 16 comparables selected by the assessee in its TP study and had further selected 10 more companies to the list of comparables and arrived at the arithmetic mean of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o software development and accordingly, non-availability of break-up of revenue from software services and sale of software products does not affect comparability. We find that main crux of the argument of the ld. DR is that software development and sale of software products are both one and the same and cannot be construed as separate and distinct activity per se. We find that the ld DR argued admitted the fact that there is no segmental break up of revenue in respect of sale of software products and revenue derived from software development in respect of the aforesaid comparables in the annual reports of the respective comparables, but nevertheless, the same would not affect the comparability with the assessee , as according to him, both the software development and sale of software products are one and the same activity. We are unable to persuade ourselves to accept this argument of the ld. DR that there is no difference between company engaged in software development and company engaged in sale of software products. We find that the Hon'ble Jurisdictional High Court in the case of CIT vs. PTC Software (I) Pvt.Ltd. in Income Tax Appeal No.732 of 2014 dated 26/09/2016 had address ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LS Ltd. and Helios & Matheson Ltd. are comparable for the subject assessment year with that of the respondent assessee. d) In the above view, as the findings of the Tribunal being one of the fact which has not been shown to be perverse, the question as proposed does not give rise to any substantial question of law. Thus, not entertained." 9.2. Respectfully following the aforesaid decision of Hon'ble Jurisdictional High Court, we hold that sale of software products and software development services are separate and distinct and accordingly, the arguments advanced by the ld. DR are rejected in this regard. Accordingly, the aforesaid comparables i.e Thirdware Solutions Ltd, Persistent Systems Ltd, and Kals Information Systems Ltd. deserves to be excluded from the list of comparables which had been rightly directed by the ld. CIT(A) for exclusion. With regard to exclusion of Tata Elxsi Ltd, we find from 895 to 898 of the paper book, there is no segmental data available in the annual report of the said comparable and we also find that they have got their own research and development which makes it functionally uncomparable with that of the assessee, among others, in as much as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed service tax refund of ₹ 28,13,031/- for its FCEC Chennai unit u/s.10A of the Act which was rejected by the ld. AO on the ground that they do not have any nexus with the activities which qualified for deduction u/s.10A of the Act. We find that the reasoning given by the ld. AO for rejection of claim of deduction u/s.10A of the Act is same for both the eligible units stated supra. It is not in dispute that service tax was paid by the assessee in earlier years for these eligible units and claimed as deduction, pursuant to which the claim of deduction u/s.10A of the Act had indeed been reduced to that extent. When the said service tax had been refunded to the assessee during the year under consideration, and also in view of the fact that the said eligible unit still continues for claim of deduction u/s.10A of the Act during the year under consideration, there is no reason to disturb the claim of deduction u/s.10A of the Act for the same. Moreover, we find from the provisions of Section 10A (4) of the Act that the entire profits of the eligible undertaking are entitled for deduction u/s.10A of the Act and there is no scope for exclusion of the service tax refund as not eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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