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TMI Blog2018 (2) TMI 2054X X X X Extracts X X X X X X X X Extracts X X X X ..... service segment, the TPO accepted the same at arms length and therefore there is no dispute of arms length price in the said segment. Since there are disputes with regard to the arms length price in respect of software development services of ITES we will discuss the issue involved in these two segments one by one. 3. Software Development Services:- To bench mark its international transaction in software development segment, the assessee selected 17 comparable companies with an average profit margin of 13% of cost in comparison to the assessee's margin at 13.16%. Thus, the assessee claimed its international transaction at arms length. The TPO did not accept the TP study analysis of the assessee and carried out a fresh search. The TPO finally selected 11 companies as under. The TPO has computed the mean margin on cost at 24.32% and after allowing minus working capital adjustment 0.73% has computed adjusted margin at 25.05%. Thus the TPO has proposed an adjustment u/s. 92CA of Rs. 14,75,07,706/-. The assessee challenged the action of the TPO before the CIT(A). The CIT(A) has granted part relief to the assessee by excluding certain companies from the set of comparable by appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n risk level into numbers, quantitatively. Brief facts are as under. "(a) The Assessee is a wholly owned subsidiary of Misys India Holding Ltd., United Kingdom, which is a part of the Misys Group. The Assessee in engaged in the business of provision of SWD services, ITE services and marketing support services to its Associated Enterprises ("AEs"). (b) During the previous year relevant to the assessment year 2009-10, two of the international transactions that took place between the Assessee and its AEs were the provision of SWD services by the Assessee at a price of Rs. 1,27,96,01,655/-, for which a TP Adjustment was made by the TPO to an extent of Rs. 14,75,07,706/- and the provision of ITe Services by the Assessee at a price of Rs. 5,82,93,156/- in respect of which an adjustment of Rs. 51,52,442/- was made by the TPO. (c) An assessment order dated 28.03.2013 came to be passed by the Assessing Officer ('AO' for short) upon incorporating the aforesaid TP adjustments. Aggrieved, the Assessee filed an appeal to the CIT(A) who, vide an order dated 15.09.2014, partly allowed the appeal. (d) Pursuant to the order of the CIT(A), the AO passed an order giving effect dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Infinera India Pvt. Ltd. Vs. ITO in IT(TP)A No. 1008/Bang/2014, in page No. 968 to the following effect "2) M/s. Bodhtree Consulting Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of M/s. Cisco Systems (Ind.) Pvt. Ltd., (Supra) and in particular, our attention was drawn to para-26.1 available on page No. 98 to 99 of Case Law Compendium. In this case, it is noted by the Tribunal that this company is in the business of software product and was engaged in providing open and end to end web solutions software consultancy and design and development of software using latest technology and therefore, the same cannot be considered as a comparable in the case of companies rendering software development services, as in the present case. Therefore, by respectfully following this Tribunal order, we hold that this company is also excluded from the list of final comparables." 7. The ld. AR has also relied upon the judgment of coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No. 1311/Bang/2014 to support its case . 8. On the basis of the above it was submitted that Bodhtree Consulting Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that Sasken Communication Technologies Ltd. is required to be excluded from the list of selected comparables by the TPO. 12. The ld. DR of revenue raised the same objections as raised by the ld. DR in respect of Bodhtree Consulting Ltd. treating Sasken Communication Technologies Ltd. as comparable with the assessee being the software development and product company. 13. We have heard the rival contentions of the parties and perused the record. In our view Sasken Communication Technologies Ltd. is required to be excluded as facts of the present case are similar to that of the VMware Software India Pvt. Ltd. Vs. DCIT (supra) wherein the coordinate bench held as under: Sasken Communication Technology Limited. 17. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that the co-ordinate bench of this Tribunal in the case of Novell Software Development India Pvt. Ltd. Vs. DCIT vide order dt. 31.8.2015 in IT(TP)A No. 1287/Bang/2011 has considered the comparability of this company in paras 25 & 30 as under: "25. As for Sasken Communication Technologies Ltd. (seg), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables. If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd., Sasken Communication Technologies Ltd. needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee's own study, then the AO/TPO has to be given a chance for verification, in view of judgment of Hon'ble Pun jab & Haryana High Court in the case of Quark Systems India P. Ltd. (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd. back to the AO/TPO for consideration afresh as per law. Ordered accordingly." "30. Accordingly we direct the AO to exclude Accel Transmatic Ltd. (seg), Avani Cimcon Technologies Ltd., Celestial Labs Ltd., E-Zest Solutions Ltd., Flextronics Software Systems Ltd. (seg), Helios & Matheson Information Technology Ltd., Infosys Technologies Ltd., Ishir Infotech Ltd., Kals Information Systems Ltd. (seg), Lucid software Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd. (seg), Tata Elxsi Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s these comparables were removed from the list of comparables on account of turnover filter. Therefore we are remitting back the matter with respect to FAR analysis of Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd. to the file of CIT(A) with the direction to decide the functionality of these companies in accordance with the rules and regulations and by following the judicial pronouncements of High Court and Tribunal decisions. As we are remitting back FAR analysis of Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd., to file of CIT(A) therefore the issue of turnover and applicability of turnover filter in these appeals became academic and leave it open to be decided in appropriate appeal. Hence Ground 2 of the Revenue appeal is disposed of being academic in nature. Further the assessee ground for exclusion of Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd., are allowed for statistical purposes. 18. The appellant has also raised the ground for inclusion of two companies viz., FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. In this regard it was submitted by the ld. AR of assessee that the TPO in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded. 21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and Loss account of M/s. Thinksoft Global Solutions for the relevant previous year is placed at paper book page 247. Software service revenues of the said company came to Rs. 920921452/-. Other income of the said company came to Rs. 35,738,801/-. Break-up of the other income as given at schedule 10 placed at paper book page 256 show that out of such amount Rs. 26,536,978/- was exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. on the ground that these companies are required to be excluded on the ground of high turnover and therefore these are not comparable with the assessee. However it was submitted by the ld. AR of assessee that there was specific objection raised by the assessee with respect to functional dissimilarity of Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. However this aspect of functionality has not been examined by the CIT(A) and therefore it was urged by the AR of the assessee that these two companies we also send back to the file of CIT(A) for examining afresh on the FAR analysis without being influenced by the turnover filter. 21. On the other hand, the ld. DR has submitted that these companies as have not been examined by the CIT(A), as he had deleted these companies by following turn over filter, therefore the ld. DR has no objection that if these two companies are sent back to the file of CIT(A) for fresh examination. 22. We have heard the rival contention of the parties, IN our view these companies are required to be send back to file of CIT(A) for FAR analysis. We accordingly do so. As we are sending back for FAR analysis of Infosys BPO Ltd. and Aditya Birla Mina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said company and submitted that substantial revenue has been earned by the said company from the business activity of medical transcription apart from billing and collection as well as medical coding activity. i) On the other hand, learned Departmental Representative has submitted that this company satisfies the filter test applied by the TPO for selecting companies in the category of Information Technology Service (ITES) company. The assessee is also engaged in the activity of providing ITeS to its AE and therefore, both the assessee as well as Accentia Technologies Ltd., are engaged in the similar business activity. He has referred to the findings of the TPO and the DRP and submitted that the DRP has rejected the objections raised by the assessee against this company. Therefore, this company is a good comparable for determination of the ALP in respect of international transactions of the assessee. ii) We have considered the rival submissions as well as relevant material on record. The first objection has been raised by the learned AR of the assessee on account of extraordinary event of acquisition/purchase of business by Accentia Technologies Ltd., whereby M/s. Oak Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in the high-end services and therefore, this company is basically a KPO and not a BPO. He has referred to Annual Report of this company at page 26 of the paper book-II and submitted that as it is clear from the Annual Report that this company is a knowledge process outsourcing (K.P.O.) providing data analytics and data process solutions to global enterprise clients. This company supports core and complex activities for its clients using proprietary processes and a scalable offshore delivery model. This company has access to the capital market and therefore, this company is a public listed KPO company in India. The company is also engaged in consulting services and process outsourcing as well as in the activity of process re-engineering and automation apart from middle office and back office support to capital market. Therefore, keeping in the diversified high-end services, this company cannot be considered as functionally comparable with the assessee. In support of his contention, he has relied upon the decision of the Special Bench of the Mumbai Tribunal in the case of Maersk Global Services (147 ITD 83). i) On the other hand, learned Departmental Representative has submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. M/s. eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s. eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of ITeS and therefore, it qualifies all the filters applied by the TPO. He has relied upon the orders of the authorities below. ii) We have considered the rival submissions as well as the relevant material on record. There is no dispute that this company is in the business of providing service of medical transcription and consultancy services, translations services and accounts BPO. The segmental revenue from the operations are given in schedule 8 to the Profit & Loss account which reveals that major revenue of Rs. 6,99,35,756/- out of total revenue of Rs. 7.37 crores has been earned by this company from the activity of translation services. We further note that the company has debited an expenditure of more than Rs. 3 crore on account of translations charges paid. Thus it is clear that this company is outsourcing its services of translation work which is the main activity of this company yielding major revenue earned during the year. Thus it is manifest from the record that this company is in the entirely different nature of activity and cannot be compared with the activity of providing contact centre of the assessee to its AE. In the case of Lam Research (India) Pv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confined to Translation charges paid at Rs. 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of Rs. 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incomparable on the alternative argument advanced by the Ld. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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