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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 ..... . The only issue to be decided in this appeal of the assessee is as to whether the ld. CIT(A) was justified in upholding the action of the ld. AO in proportionately allocating the head office expenses while computing the profit eligible for deduction u/s.10A/10B of the Act. 3. We have heard the rival submissions. Both the parties before us fairly conceded that this issue has been remanded back to the file of the ld. AO for fresh adjudication in A.Y.2009-10 by the order of this Tribunal for the A.Y.2009-10 in ITA No.4142/Mum/2018 dated 25/09/2017 wherein it was held as under:- "13. We have heard both the parties and considered the materials available on record. The AO has allocated head office 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .29 crores from software development services segment and also erred in not applying the filter of large scale of operations to the other companies selected as comparables by the TPO particularly M/s LGS Global Ltd., M/s Sasken Communication Technologies Ltd. and M/s Mindtree Ltd., which had large scale of operations in comparison to the software development segment of the assessee?" (ii) "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to exclude companies namely M/s Thirdward Solutions Ltd., M/s Persistent Systems Limited, M/s Tata Elxsi Limited and M/s Kals Information Systems Ltd. from the final set of comparables for 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 adjudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision of engineering and related services 208,78,36,974 5. Provision of IT support and related services 22,61,62,710 6. Provision of software development and related services 22,29,12,328 7. Provision of facilitation support services 3,39.17,838 8. Import of capital assets 1,12,74.302 9. Broadband Connectivity charges 1,10,19,538 10. Reimbursement of expenses 2,02,20,517 11. Recovery of expenses 31,55,04,848 5.2. The assessee company had entered into international transaction with its AEs in respect of provision of software development and related services. The operating margin of the assessee from its software 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as part of operating expenses by the ld. TPO. After excluding certain comparables chosen by the assessee in the TP study report and after including certain fresh comparables for the purpose of benchmarking the international transaction of software development services provided to AE by the assessee, the final set of comparables chosen by the ld. TPO together with the respective margins were as under:- S. No. Company Name Margins on single year bases (%} OP/TC 1 Akshay software technologies limited -1.07 2 FCS Software Solutions Ltd. 49.03 3 LGS global Ltd (Lanco global systems limited) 11.96 4 Mindtree limited 16.13 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 Infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Willis Processing Services India Pvt Ltd pertaining to AY 201011, has departed from the earlier position in AY 2007-08 relied upon by the TPO in relation to high turnover in light of the Delhi High court decision in the case of Agnity India Technical Pvt Ltd. 7.13.6 The submissions made by the Appellant have been examined. On examining the Annual Reports, the turnover of the above comparable companies vis-avis that of the Appellant (being Rs. 22.29 crores) were observed to be as follows: S. No Name of comparable Turnover in AY 2010-11 No. times of Appellant's turnover (i) Infosys Ltd Rs. 21,140 crores 961 times (ii) L&T Ltd Rs. 1,776 crores 81 times (iii) Wipro Ltd Rs. 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 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Rs. 250 crores respectively on advertising and brand building activities. Further, as highlighted by the Appellant in page 29, 30 and 57 of their submissions, both Infosys Ltd and Wipro Ltd undertake significant R&D activities own significant intangibles such as brands and patents. This indicates that Infosys Ltd and Wipro Ltd are -.-:'. market leaders with huge brand value associated with them. It has been brought to attention (pages 27, 28, 55 and 56 of the submission) that 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-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant has submitted extracts from the website to evidence that Thirdware is engaged in end to end solutions application implementation, management and development services with core competencies in areas of ERP, business intelligence, technology and sales force. These services are completely different from the services rendered by the Appellant wherein the software development activities undertaken by the Appellant are based on guidance and instructions 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. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 5.7 crores (i.e. 8.47% of operating revenue). It is observed that Thirdware predominantly derives its revenue from export from STPI and SEZ units (i.e. 87.02% of operating revenue). It is further observed that there is no information available in the annual report of Thirdware which indicates the nature of revenue from the exports from STPI and SEZ units. Therefore, I find force in the Appellant's arguments that in the absence of such information Thirdware's revenue from software service is only Rs. 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 Rs. 39.16 lac, "Software services' amounting to Rs. 7.67 crore, 'Export from SEZ unit' amounting to Rs. 26.39 crore, 'Export from STPI unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the company is not just engaged in software development services but is also a software product company. Further, the distinction between a product based company such as Persistent and a software development service company like the Appellant was brought to our attention (page 51 of the submission). It is observed that product based companies like Persistent undertake significant functions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables." 3DPLM Software Solutions Ltd (supra) "It is seen from the details 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra) was examined and it was noted that the Hon'ble Tribunal directed Tata Elxsi to be excluded from the comparables. The relevant extracts of the decision is reproduced below. "From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hted the Pune Tribunal decision in case of TIBCO Software India Pvt. Ltd. [ITA No.2536/PN/2012] and Mumbai Tribunal decisions in case of Nethawk Networks India Pvt Ltd (ITA No. 7633/M/2012) and Prana Studios Pvt Ltd (ITA No. 2077/Mum/2014) 7.13.69 It is observed from the annual report that Kals is engaged in software product 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." Neth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the assessee in respect of final comparables that are to be decided pursuant to his order:- * ACI Worldwide Solutions Pvt. Ltd (ITA No. 651/Bang/20l2) * Sun Life India Service Centre Pvt. Ltd (ITA No.l489/Del/2014) * Apigee Technologies (India) Pvt. Ltd (ITA No. 870/Bang/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 sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Tata Elxsi Ltd and Kals Information Systems Ltd. from the final set of comparables as directed by the ld. CIT(A) on the ground of functional dissimilarities, the ld. DR argued that anything related to automizing the operations in digital format tantamount to 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 bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts, the Tribunal rendered a finding of fact that KALS Ltd. and Helios & Matheson Ltd. are not comparable with the respondent assessee. c) Even before us, no submissions were advanced justifying the order of the Assessing Officer that the services rendered by KALS 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d accordingly, computed deduction of proceeds u/s.10A of the Act. We find that the ld. AO rejected the claim of deduction u/s.10A of the Act to the tune of Rs. 22,45,475/- pertaining to the refund of service tax of EDEC unit. Similarly, the assessee has claimed service tax refund of Rs. 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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