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TMI Blog2020 (11) TMI 335X X X X Extracts X X X X X X X X Extracts X X X X ..... ogether in one segment. Thus, in the absence of such segmental details, the company is functionally not comparable to assessee which is a captive software development provider. ICRA Techno Analytics Limited - company has significant growth in the business intelligence and analytics space which shows that the activities carried out are different from that the assessee. The revenue recognition policy of the company also shows that the company is engaged in rendering diverse services. The services rendered by the company as per its website also include services akin to IT enabled services/KPO services. Persistent Systems Solutions Limited to be excluded from the list of comparables as composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. Since we have directed the exclusion of five comparables, the final list of comparable is only Evoke Technologies Private Limited and R S Software (India) Limited. The assessee's margin being 14.87% for provision for software development services would be more than the arithme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied services to its AE. During the relevant assessment year, the assessee had entered into three international transactions with its AE. One of the international transactions was provision of software development services amounting to ₹ 110,75,19,991. The operating margin of the assessee was declared at 14.87%. The profit level indicator was OP/OC. The details of the same are as follow:- Operating Income ₹ 1,10,75,19,991 Operating Cost (Less forex loss) ₹ 96,41,66,619 Operating Profit (Op. income Op.Cost) ₹ 14,33,53,373 Operating / Net Margin (OP/OC) 14.87% 3.2. The assessee in its TP study had adopted methodology of TNMM. The assessee had taken 12 comparable companies. The arithmetical mean of 12 comparables selected by the assessee was 12.16%. Since the assessee's net margin (OP/OC) was 14.87% compared to arithmetical mean of 12.16% of the comparables, the assessee sought to justify the Arm's Length Price (ALP) of its international transaction with its AE. 3.3. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Systems Solutions Limited 22.12 22.94 10. Persistent Systems Limited 22.84 23.38 11. R. S. Software (India) Limited 16.37 17.97 12. Sasken Communication Technologies Limited. 24.13 26.29 13 Tata Elxsi Limited (seg.) 20.91 20.71 AVERAGE MARGIN 24.82 25.58 Computation of arm s length price by the TPO and the adjustment made Arm s length mean margin on cost 24.82% Less : Working capital adjustment -0.95% Adjusted mean margin 25.77% Opearting cost ₹ 96,41,66,6519 Arm s Length Price 125.33% of operating cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng orders of the Bangalore Bench of the Tribunal in the case of (i) Applied Materials India Pvt. Ltd. v. ACIT [IT(TP) A Nos. 17 39/Bang/2016 - order dated 21.09.2016], (ii) Electronics for Imaging India P. Ltd. v. DCIT [ (2017) 85 taxmann.com 124 (Bangalore-Trib.)], and (iii) Commscope Networks (I) Pvt. Ltd. v. ITO [IT(TP) A Nos. 166 181/Bang/2016 - order dated 22.02.2017]. 4.1. The learned Departmental Representative relied on the TPO's and DRP's orders. 4.2. We have heard the rival submissions and perused the material on record. As per the Annual Report for Acropetal Technologies Limited, for the financial year 2011-2011, we noticed that the income from software development services is less than 75% of the total revenue and the company is not comparable towards software development service provider. In this context, the Bangalore Bench of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT (supra) in the case of a similarly placed assessee and for the same assessment year, had held as follows:- 16.4 We have considered the rival submissions as well as the relevant material on record. As per the segmental reporting at page 53 of the Annual R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utsourcing (KPO) services. Since there are no segmental details available in its Annual Report for the above diverse activities, it is apparent that the company is not comparable and the same needs to be excluded from the final list of comparables. In this context, we rely on the order of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. v. DCT [(2014) 42 taxmann.com 333 (Bangalore-Trib.)] wherein it has been held that e-Zest Solutions Limited is rendering product development and end to end technical services which comes under the category of KPO services and this cannot be compared to software development providers. The Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. was dealing with the assessment year 2009-2009. However, identical situation remains for this assessment year also viz., 2011-2012. On perusal of activities mentioned in financial of e-Zest Solutions Limited, it is clear that the company continued to come under the KPO services. Therefore, the said company is directed to be excluded from the final list of comparables. III. E-INFOCHIPS LIMITED 6. The learned AR submitted that E-Infochips Limited is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software 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. 6.3. In the light of the above order of the Tribunal and the aforesaid reasons, we direct E-Infochips Limited to be excluded from the list of comparables. IV. ICRA TECHNO ANALYTICS LIMITED 7. The assessee seeks exclusion of ICRA Techno Analytics Limited on the ground tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f software development, software consultancy, engineering services, web development, web hosting, etc., for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables. 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. Nothing has been brought before us to show that the facts recorded by the DRP as well as by the co-ordinate bench of this Tribunal are not correct. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26 as under: Persistent Systems Solutions Ltd. 60. The assessee has the grievance against rejection of this company by the DRP. The Id. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. 61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of ₹ 6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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