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TMI Blog2020 (3) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has raised multiple grounds of appeal, however, contention of the Ld. AR at the time of hearing is that if three comparables i.e. (i) Persistent System Limited (ii) Thirdware Solutions Limited and (iii) MPS Limited are excluded from the final list of comparables, the rest of the grounds raised in appeal by the assessee becomes academic in nature. 3. The assessee has also filed an application praying for admission of additional ground based on the decision of the Hon‟ble Supreme Court of India in the case of NTPC Vs. CIT reported in 229 ITR 383 (SC) where the ITAT is empowered to admit such additional ground. The Ld. AR of the assessee submitted that the additional ground does not require any fresh verification of facts since the issue involved therein is purely a question of law and the same reads as under: Additional ground: 13.1 On the facts and circumstances of the case and in law, the Appellant prays that the liability for education cess of income tax paid for the year ought to be allowed as a deduction while computing the total income. 4. The Ld. DR did not raise any objection with regard to admission of additional ground for adjudication. 5. Ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no.3 is required to be reversed and the said issue is answered in favour of the assessee. From the above, it is evident that education Cess, which is not disallowable item, on its payment, the cess is an allowable expenditure as per provision of section 40(a)(ii) of the Act. Considering the settled nature of the issue as per the ratio laid down in the above referred case by the Hon‟ble High Court of Judicature for Rajasthan Bench at Jaipur, ground of Cross objection No.4 is allowed. Respectfully, following the decision of the Co-ordinate Bench of the Tribunal, Pune in the above referred case, we allow this additional ground in favour of the assessee. Thus, additional ground raised in appeal by the assessee is allowed. Adjudication of the grounds in appeal memo 8. The brief facts involve in this case are that the assessee company was incorporated on 12.09.1995 as a subsidiary of Symantec Operating Corporation USA. The ultimate parent company is Symantec Corporation, USA. The assessee has two units registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing study report. Since the weighted average PLI of comparable companies is less than its own PLI in case of technical support services, it was contended that its international transactions of technical support services are at the arm‟s length. On the basis of this exercise, the assessee argued that its international transactions were at the arm‟s length. EXCLUSION OF COMPANIES AS COMPARABLES TO SOFTWARE DEVELOPMENT SERVICE SEGMENT (A) Persistent Systems Limited:- 9. The Ld. AR of the assessee submitted that Persistent Systems Limited is engaged in the OPD which is non comparable to software development of the assessee. Persistent Systems is engaged in sale of software products; services and technology innovation covering full life cycle of product. Persistent Systems has been rejected as non comparable to software development services by various Hon‟ble High Court and ITAT in various judicial precedents. The TPO observed that the assessee has relied upon the annual report for FY 2009-10 to support its contention that the OPD (Outsourced Software Product Development) business operations carried out by Persistent Systems are different from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice segment is 14.34% (OC/OP). Since PLI margin of the assessee falls beyond the limit of +/- 3% u/s.92C(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act‟), the TPO proposed adjustment over operating income of ₹ 6731.28 Lakhs. 9.1. The Ld. AR of the assessee further submitted that the assessee has been continuously contesting for rejection of Persistent Systems as functionally non comparable to software development service provider in past years before various forums. The Annual report of Persistent Systems for FY 2013-14 clearly states that Persistent Systems is a leader in the outsourced software development(OPD) which is non comparable to software development segment of the assessee. The Ld. AR of the assessee further submitted that Persistent has derived revenue from licensing of software products, product engineering and royalty and breakup of the same in revenue from software services is not available in its annual report for F.Y.2012-13. Before the Ld. DRP, Ld. AR placed reliance on the various decisions showing that Persistent Systems has specifically been rejected as non comparable to software development service provider. However, the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in rendering IT services and in the development of software products without there being support segmental information. During the year the company made acquisitions. We observe that the Hon‟ble Delhi High Court in the case of Pr. CIT Vs. Saxo India Pvt. Ltd. ITA No.682/2016 has held as follows: 10. On a comparison with the data available and made available undoubtedly, the object of the statute is to pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology-shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ . The TNMM method depends on accurate data with respect to all the three elements- wherever they apply. In the Comparable Uncontrolled Price (CUP) method-which is premised upon the elements in Rule 10B(1)(a), the methodology adopted in the price charged or paid for property transfer or services provided in the Comparable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which have been outsourced by clients and the company does not own IP to these products and the product development is nothing but software development services. With respect to the intangibles of the comparable company, it was found that overseas subsidiary companies have acquired certain IP products and that the comparable is predominantly engaged in the software development services. Further, the intangibles with the comparable are in the nature of software license acquired for use in the operation of the company and they are not the software products generating revenue. The disclosure in the annual report regarding the acquisition of the products relate to the group as a whole and not to the stand alone as entity whose financials are compared. The R D expenditure of the comparable relates to cross improvements and not to innovate on new products or earning additional revenue. Hence, the R D is not affecting the margin of the company. The TPO had applied related party filter of greater than 25% and clearly this company passed the filters. Hence, the TPO rejected the contentions of the assessee and held the company as comparable. The DRP held that the company is functionally simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company is predominantly engaged in Outsourced Software Product Development Service‟ for independent software vendors and enterprises. iii) Website extracts indicate that the company is in the business of product design services. iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, the company, i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven separately. Therefore, following the principle enunciated 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 comparable 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. It is ordered accordingly. 13.3 It is clear from the finding of this Tribunal that this company is engaged in the product developing and product design services which is similar with the software development services provided by the assessee. Accordingly, following the decision of the co-ordinate bench of this Tribunal (supra) we direct the TPO/A.O. to exclude this company from the list of comparables. 10.4 The Ld. AR relied on the order of the ITAT, Bangalore in the case of MetricStream Infotech (India) Pvt. Ltd. vs. DCIT in IT(TP)A Nos. 1418 2735/Bang/2017 dated 27/02/2019 which we have discussed in earlier para. 10.5 We have heard the rival submissions and perused the material on record. In view of the above orders of the ITAT cited in para 10.1 to 10.4 of this order, we direct the AO/TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... squarely covered by the decisions of Hon‟ble High Courts and Tribunals. With regard to inappropriate acceptance of Thirdware Solutions Limited as functionally comparable, the Ld. AR of the assessee placed strong reliance on the following decisions: (i) M/s. Emerson Electric Company (India) Private Limited Vs. ACIT, ITA No.6098/Mum/2018 and ITA No.531/Mum/2018 (ii) M/s. John Deere India Pvt. Ltd. Cybercity Vs. ACIT in ITA No.518/PUN/2015 (iii) M/s. ION Trading India Private Limited Vs. ITO, ITA No.1035/Del/2015 (iv) Sun Life India Service Centre Pvt. Ltd. Vs. DCIT, ITA No.1489/Del/2014 (v) M/s. EMC Software and Services India Pvt. Ltd. Vs. JCIT, ITA No.3375/Bang/2018. 16. We have perused the case records and heard the rival contentions. We observe that Thirdware Solutions Limited is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses. Further, the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. We find in the case of M/s. EMC Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val submissions and gone through the relevant material on record. The Annual report of this company is available at page 415 onwards of the paper book. Profit and loss account of this company shows `Sales‟ of ₹ 67,56,06,505/-. Break-up of such sale has been given in Schedule 12, which records `Export from SEZ units‟ ₹ 47,58,40,447/-; `Export from STPI units‟ ₹ 11,20,90,633; `Revenue from subscription‟ ₹ 1,53,13,736/-; `Sale of licence‟ ₹ 1,51,38,618/-; and `Software Services‟ ₹ 5,72,23,072/-. This company has segments only on geographical basis and not on functional level. As such, there is no bifurcation of operating profit from Software Services and others including Sale of licence and Revenue from subscription etc. Even the first two major items of `Exports from SEZ units‟ and `Export from STPI units‟ do not show as to whether these were exports of Software products or Software Services. In the absence of the availability of any concrete information in respect of Software Services, we fail to comprehend as to how this company, also having software products in its portfolio, can be const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertakes R D activities unlike the assessee which substantiate that MPS Limited undertakes high end activity which is akin to IT services and not ITes. The Ld. AR further submitted that there is no break up available regarding the same and ought to be removed as a comparable company and therefore, the DRP had wrongly approved the action of the TPO in including MPS Limited in the list of comparables. 19.1 The Ld. AR of the assessee also submitted that on account of functionally not comparable, MPS Limited should be excluded from the list of comparable companies. The issue of non-comparable of MPS Limited is squarely covered by the decisions the Tribunals. With regard to inappropriate acceptance of MPS Limited as functionally comparable to its technical support services segment, the Ld. AR of the assessee placed strong reliance on the following decisions: (i) Emerson Electric Company (India) Private Limited Vs. ACIT in ITA No.6098/Mum/2018 ITA No.531/Mum/2018 (ii) United Health Group Information Services Pvt. Ltd. Vs. ACIT in ITA No. 6312/Del/2012 (iii) iQor India Services Private Limited Vs. ITO, in ITA No.6034/Del/2012 (iv) GE India Business Services Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is the TPO who has adopted this company as comparable. On such adoption, the assessee has every right to raise the objections as regards the functional differences between the assessee and comparable. It is the bounden duty of the TPO to consider the said objections in accordance with law. As brought out by the assessee, the assessee is in the TT enabled services, whereas the said company Apex Knowledge Salutation Pvt. Ltd., is in the business of E-publishing which cannot be said to be in the same line of business. The functional differences are likely to affect the profit marking capacity of both the companies. In view of the same, we are of the opinion that this company is also to be excluded from the list of comparables. 9.3. In view of the above, we hold that the comparable chosen by the ld. TPO, M/s. MPS Ltd., is functionally not comparable with that of the assessee and accordingly, we direct the ld. TPO to exclude the same from the list of comparables. 21. We further observe in the case of United Health Group Information Services Pvt. Ltd. Vs. ACIT (supra.) wherein with regard to Vishal Informatics which is engaged in e-publishing business like the company in the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compared with that of company which is into business of BPO. The revenue recognition note states that the company is deriving revenue from website design and development and website hosing which is not similar to ITes. Further, MPS Limited underwent type-setting, data digitization, content and product development for learner which as per Safe Harbour Rules issued by Central Board of Direct Taxes qualifies to be in the nature of KPO. In view of the above, respectfully following the decisions of the Tribunal as mentioned hereinabove, we are of the considered view, high end activities of the MPS Limited is akin to IT services and not ITes. The activities of the MPS Limited i.e. typesetting, data digitization, content development and product development are in the nature of Knowledge Processing Outsourcing Services (KPOs) and not BPO. Accordingly, MPS Limited cannot be treated as comparable company and the AO/TPO is directed to exclude MPS Limited from final list of comparable companies with regard to its technical support service segment. 23. Since we have directed the AO/TPO to exclude three comparables i.e. (i) Persistent System Limited (ii) Thirdware Solutions Limited and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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