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TMI Blog2021 (9) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... s all the filters applied by the TPO and therefore ought to stand excluded from the final list of comparables. E-Zest Solution Ltd. is concerned, this company was directed to be excluded by this Tribunal in the case of a SWD service provider such as the Assessee as functionally not comparable and absence of segmental information of its products and software development segments and also in the light of presence of inventory showing that this company is a product company. As far as exclusion of Persistent Systems and Solutions Ltd., is concerned, we find that this company was again excluded in the decision in the case of Autodesk India Pvt. Ltd. [ 2018 (12) TMI 1742 - ITAT BANGALORE] for the very same reasons for exclusion of e-Zest solutions Ltd. We therefore direct exclusion of this company from the list of comparable companies. Computation of deduction u/s 10A - exclusion of telecommunication expenses and expenses incurred in foreign currency for rending technical services outside India, both from the export turnover and total turnover - HELD THAT:- It is not in dispute before us that the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [ 2011 (8) TMI 782 - KA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luencing the profit margin of the company exist, for which appropriate adjustments cannot be made to balance the effect. This company is therefore excluded as comparable company. Accentia Technologies Ltd is engaged in rendering routine low end information technology enabled services. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivables cycle management and high end consultancy to start-ups requiring field experts. As can be seen from the annual report, coding income is contributing 15% of the total income which activities are akin to software development activity while the assessee is a mere provider of IT enabled services. The company has invested huge sums in the development of EMR software. Segmental details of its various activities are unavailable, therefore, not comparable to the Assessee and rejected as a comparable. ICRA Online Ltd is functionally dissimilar for the reason that the outsourced services segment of the company is engaged in the provision of high end consultancy services which cannot be compared to the assessee who is into provision of low end IT enabled services which are routine in nature. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in facts, by accepting / rejecting the companies based on unreasonable comparability criteria The learned AO/DRP/TPO has failed to appreciate the fact that the following companies are not functionally comparable to the software development segment of Appellant, therefore has erred in law and in facts in considering them as comparable companies: a. Acropetal Technologies Limited b. E-Infochips Limited c. ICRA Techno Analytics Limited d. Persistent Systems and Solutions Limited i) The learned AO/ TPO and the learned DRP have erred, in law and in facts, by accepting / rejecting companies based on unreasonable comparability criteria; i. The learned AO/DRP/TPO has failed to appreciate the fact that the following companies are not functionally comparable to the IT enabled service segment of Appellant, therefore has erred in law and in facts in considering them as comparable companies: a. Accentia Technologies Limited b. Acropetal Technologies Limited(seg) c. ICRA Online Limited d. Jeevan Scientific Technologies Limited 4. We shall first identify the issues to be decided in these cross appeals. The issues that arise in these cross appeals are with regard to determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the Any income arising from an international transaction shall be computed having regard to the arm's length price. SOFTWARE DEVELOPMENT SERVICES SEGMENT : 7. It is not in dispute between the Assessee and the Revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 14%. The Assessee in it's TP study selected comparable companies whose arithmetic mean profit margin was comparable with the profit margins of the Assessee. Since the profit margin of the Assessee was comparable with the arithmetic mean of OP/TC of the comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue. From the annual report of the company it can be seen that the employee costs incurred by the company is 11.51% of the total operating revenue. Apart from the above, the Company also fails the TPO's filter of service revenue is excess of 75% as the income from software development activity is Rs. 81.40 Crores out of total operating revenue of Rs. 141 Crores. As it is clear that the company fails TPO's own filters of employee cost in excess of 25% and service revenue is excess of 75%, the company ought to remain excluded from the final list of comparables. We also find that this Tribunal in Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A Nos. 17 & 39/Bang/2016 ] at paras 16.1 to 16.4 at pages 1606-1607]; Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 15 at page 1744]; Electronic Imaging India P. Ltd v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib) para 8 at pages 1725- 1726] and Commscope Networks (I) Pvt. Ltd. v. ITO [TS-161-ITAT-2017(Bang)-TP at para 9 on pages 1639-1640] held that this company should be excluded from the list of comparable companies in the case of companies engaged in rendering SWD service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in diversified activities of software development and consultancy, licensing and sublicensing, annual maintenance for software support, web development & hosting and revenue from all the activities are reported under one segment, without any segmental information regarding the same made available. Therefore, in the absence of segmental information, it cannot be ascertained whether the company passes all the filters applied by the TPO and therefore ought to stand excluded from the final list of comparables. We also find that this Tribunal in Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A Nos. 17 & 39/Bang/2016] at paras 17.1 to 17.2 at pages 1607-1609]; Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 at page 1744]; and Electronics Imaging India P. Ltd v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib) para 10 at pages 1727] excluded this company from the list of comparables in the case of companies that were engaged in rendering SWD services similar to that of the Assessee. We therefore direct exclusion of this company from the list of comparable companies. 13. As far as exclusion e-Zest Solution Ltd. is concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as being operating in nature. In this regard it was submitted that the gains on account of fluctuation in foreign currency has arisen from the international transaction of provision of ITE services and SWD services. The gains are inextricably related to rendering of the main services and are not derived independently. As the gains relate to the rendering of the main service, the same ought to be treated as operating in nature. Reliance in this regard was placed on the following decisions: - SAP LABS India (P.) Ltd. v. ACIT ([2011] 44 SOT 156 (Bangalore) at para 42); - PCIT v. B.C. Management Services (P.) Ltd. ([2018] 89 taxmann.com 68 (Delhi), at paras 7 and 8); - PCIT v. Ameriprise India Pvt. Ltd. (Order dated 23.03.2016 passed in ITA No. 206/2016 at paras 3 and 4) The learned DR reiterated the stand of the Revenue as reflected in the grounds of appeal raised by the Revenue in this regard. 17. We have carefully considered the rival contentions. The Hon'ble Delhi High Court in the case of PCIT Vs. B.C. Management Services (P) Ltd., (supra) held that foreign exchange gain has to be regarded as part of operating income by following its own order in Pr. CIT v. Cashedge India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ific Technology Ltd., and ICRA Online Ltd. We find that the above companies ought to have been rejected by the DRP and the same requires interference from this Hon'ble Tribunal. We find that Acropetal Technologies Ltd., is engaged in the business of software development and services, contract centre service and IT enabled services and the same are reported together as one segment. In the absence of segmental details made available, the company could not be treated as a comparable. The TPO, while choosing the company as a comparable, has selected its Engineering Design Segment ('EDS' for short) which is in the nature of high end IT enabled services which are in the nature of Knowledge Process outsourcing ("KPO"). The high end services provided by the company cannot be compared with the routine services provided by the Assessee. This is a settled position and reliance can be placed on the decision of this Hon'ble Tribunal's in the case of Symphony Marketing Solutions India Pvt. Ltd.(ITA No. 1316/Bang/2012) where it was held that Acropetal cannot be considered as a comparable to assessees performing routine low end IT enabled services function. This company is therefore to be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted as a comparable. As far as the company ICRA Online Ltd., is concerned, the details regarding its diverse functions are reported under one segment without segmental details regarding the same being made available. Therefore, the comparability of the company cannot be determined. In any event, this company is functionally dissimilar for the reason that the outsourced services segment of the company is engaged in the provision of high end consultancy services which cannot be compared to the assessee who is into provision of low end IT enabled services which are routine in nature. Further, the company fails the TPO's own filter of export turnover in excess of 75% of total sales as the export turnover of the company amount to only 61.88% of its sales. Therefore, the company cannot be held as a comparable to the assessee.
21. The TPO is directed to compute ALP in accordance with the directions contained in this order after affording Assessee opportunity of being heard.
22. In the result appeal by the Assessee is partly allowed and the appeal by the Revenue is dismissed.
Pronounced in the open court on the date mentioned on the caption page. X X X X Extracts X X X X X X X X Extracts X X X X
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