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TMI Blog2022 (5) TMI 1450X X X X Extracts X X X X X X X X Extracts X X X X ..... imes that of the assessee - We direct the AO/TPO to exclude this company from the list of comparables. Thirdware Solutions Pvt. Ltd is to be excluded from the list of comparables. L T Infotech Ltd - We see the revenue in Schedule M of the profit loss account, there is no break-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies. Melstar Information Technologies Ltd - A.R. submitted that this company Melstar Information Technologies Ltd. is a loss making company in the last 3 continuous successive assessment years and if there is a profit in any one of the past 3 financial years, then that company cannot be excluded on the basis of persistent loss making filter - it is appropriate to remit the issue to the file of AO/TPO to decide the same in the light of above findings of the Tribunal. Accordingly, the issue is remitted to AO/TPO for fresh consideration. Appropriate adjustments towards working capital - After hearing the parties, we direct the AO/TPO to grant appropriate adjustments towards working capital as directed by Ld. DRP. In other words, actual worki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O/Hon'ble DRP erred in applying export earning filter of 75% of the total sales, leading to a narrower comparable set. • 8. The learned AO/learned TPO/Hon'ble DRP erred in rejecting companies having ratio of employee cost to sales of less than 25%. 9. The learned AO/ learned TPO/ Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies. 10. The learned AO/ learned TPO/ Hon'ble DRP erred in the method of computing the percentage of related party transaction of 25% to total sales. 11. The learned AO/ learned TPO/ Hon'ble DRP erred in accepting companies that ought to have been rejected as comparable: * Tata Elxsi Ltd. * Mincltree Ltd. * Persistent Systems Ltd. * InfoBeans Technologies Ltd. * Nihilent Technologies Ltd. * Aspire Systems (India) Pvt. Ltd. * Infosys Ltd. * Thirdware Solutions Ltd.k---- * Cybage Solutions Ltd. * Larsen & Toubro Infotech Ltd. * Rheal Software PVt. Ltd. * Inteq Software Pvt. Ltd. 12. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting companies that ought to have been accepted as comparable: * Akshay Software Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diverse areas such as analytics, information management, application development business process management, business technology consulting, infrastructure management services, product engineering & SAP services. It was also contended that this company is engaged in sale of product and also engaged in outsourcing IT services in banking and financial services and insurance sector and also as R&D operations and patents and hence not functionally comparable. However, Ld. Dispute Resolution Panel ("DRP") observed that this company is only engaged in software development and related services as seen from its financials. Therefore, the plea of the assessee that company performs different and diverse activities and hence functionally different was rejected by Ld. DRP. Further, it was observed by Ld. DRP that provision of data analytic services is not functionally different from software development activity. Data analytic services also used only in certain software and tools, writes codes task. Like in other software application, these tools also facilitate and enable business of enterprises for enough management and decisions. Therefore, the Ld. DRP observed that there cannot be any di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R&D & intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. (supra) and in the light of this decision and the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly." 5.2. In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Directed accordingly. II. Persistent systems Limited:- 6. The Ld. A.R. submitted that this company is a product-based company and has revenue from software licenses; that it is also engaged in R&D activities with significant intan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of services provided that each of these segments differs only in terms of the industry and specific requirements of customers in each of these industries. The essential activity across all business segments can be considered to be software product development services". 6.3 Further, Ld. DRP observed that the assessee based on certain information discussed in the consolidated annual report (which included discussion of financial results of Persistent Systems Ltd and its six subsidiaries associates) argued that this company is into product development and IP led revenue. It would be totally incorrect to consider the information pertaining to the entire group as such, when the comparability is to be seen with reference to the stand alone financials of Persistent Systems Ltd, which was considered for comparable analysis by the TPO. 6.4 In this regard, Ld. DRP in his report stated that it is pertinent to note as per the consolidated annual report the revenue from software licence was Rs.535.59 million for the entire group whereas, such revenue in the case of M/s Persistent Systems Ltd was only Rs.71.45 million (Ref page 168 and page 211 of the annual report). It is also seen t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re towards R&D was only Rs.0.28 million, which clearly show that the R&D activities are routine. The value of intangible assets was only Rs.162.85 million constituting 1.31% of operating revenue. There is no reference to any intangible assets or patent owned or developed by the company, in the stand alone annual report. There is also no acquisition of intangibles during the year. Further as per note of the annual report, software product developments costs are expensed as incurred unless the technical and commercial feasibility of the project enable to use or sell the software, they are not capitalized. Such a development is not reflected in the Asset schedule. Thus, it can be inferred that the R&D and intangible assets do not have impact on the revenue and profitability of the company. The assessee has failed to establish that such differences, if any, on account of R&D, brand and IRPs have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services, there is a reference to revenue from licensing & software, which sufficiently indicates that the assessee is not a pure SWD services provider. It was also brought to our notice that the profit & loss account which is at page 596 read with Notes forming part of the financial statement at page 604 wherein the segmental reporting is not based on different segments and the statement presents a consolidated financial statement without any segmental reporting. This company has also significant RPT transaction of 25% on sales. He pointed out that the TPO & DRP on the application of RPT filter has not expressed any opinion. The ld. DR relied on the order of DRP wherein the DRP has made extensive reference to each of the objections regarding absence of segmental revenue in the accounts and has also noticed that the software products segment had an insignificant revenue and that the ownership of intangibles by the assessee has had no effect whatsoever. 33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:- 4. Fails the Related Party Transaction to Sales filter ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er as follows:- "4.4.9 We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected." 35. Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as a comparable company with a company which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007-08 dated 23.11.2012 wherein this Tribunal took the following view:- "64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management, consulting and systems integration services. All these activities fall within the gamut of 'software services', though performed in five different business verticals. As per the P&L account, the company has revenue from 'software services' of Rs.45,658/- crores and from software products of Rs.1642/- crores (refer page 61 of the annual report), and that the product revenue constitute meagre 3.6% of total operating revenue. Therefore, taking into consideration the various information available in the annual report, and the fact that the company is predominantly having revenue from software services, Ld. DRP was of the considered view that this company can be considered as functionally comparable to the assessee. Accordingly, the plea that the company is engaged in diversified activities was rejected by Ld. DRP. 7.2 A plea was raised before Ld. DRP by the assessee that this company also provides data analytic services which is high end and hence, cannot be compared to the assessee. Ld. DRP did not find merit in the plea, as undoubtedly, provision of data analytic services is not functionally different from software development activity. The data analytic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital in nature and the remaining Rs.590 crore represented revenue expenditure, which go to show that the R&D initiative are substantially routine for immediate business purposes for developing expertise and improved process execution. It was also pleaded that the company has significant intangibles. However, on perusal of the information at page 86 of the annual report, Ld. DRP noted that the value of intangible assets as on 31.03.2015 was Nil and as on 31.0.2014 was Rs.13 crore, which is insignificant considering its turnover of Rs.47,300 crore and Asset portfolio of Rs.7347 crore. Ld. DRP noted that, the assessee has failed to establish that such differences, if any, on account of brand and intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Further, as discussed in para 2.6.2.3 above, the assessee also performs R&D functions. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee." 7.9 In view of the above order of the Tribunal cited (supra) we direct the AO/TPO to exclude this company from the list of comparables. IV. Thirdware Solutions Pvt. Ltd.:- 8. The Ld. A.R. submitted that this company has to be excluded from the list of comparables on the following reasons:- * Thirdware is functionally dissimilar and ought to be rejected. * No segmental details are available in the annual report and hence the company should be rejected. * Thirdware has incurred brand promotion expense. 8.1 The Ld. A.R. for the assessee argued that this company is engaged in sale of products and diversified activities. It was also argued that there is no segmental information for the product and services business and hence cannot be taken as comparable. It was also contended that the company has intangibles and deriving revenue from licensing of software. 8.2 Ld. DRP observed that on perusal of the annual report, Ld. DRP noted that this company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 in IT(TP)A No.1673/Bang/2012 , we direct exclusion of M/s Thirdware Solutions Ltd." 8.4 In view of the above order of the Tribunal cited (supra) we direct the AO to exclude this company from the list of comparables. V. L&T Infotech Ltd.:- 9. The Ld. A.R. submitted that this company has to be excluded from the list of comparables on the following reasons:- * L&T Infotech is functionally dissimilar and ought to be rejected. * No segmental details are available in the annual report and hence the company should be rejected. * L&T Infotech has presence of intangibles. * L&T Infotech has presence of brand. * L&T Infotech has incurred brand promotion expense. * L&T Infotech fails upper turnover filter. 9.1 It was contended by the Ld. A.R. that this company provides wide range of services and also engaged in sale of products and in the absence of segmental information, this company is not comparable. It was contended that L&T Infotech is a brand across globe which has impacted the margins of the company. It was further argued that the company is engaged in trading of goods which is evident from page 1364 of the annual report for FY 2014-15. It was also argued by the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or profit of the company. The intangibles referred in the Asset Schedule represent the computer software, and business rights and as such does not refer to any IPR or license owned by the said company. Certain developments are under way which has not crystallized into an intangible to be a source of revenue. Thus, the assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas of assessee were rejected by the Ld. DRP. 9.4 On the plea as to difference in the scale & size of operations and consequent abnormal profits, Ld. DRP observed that turnover does not influence the margins in the service sector and held that turnover cannot be a criteria for selection of comparables. Hence, these pleas of assessee were rejected by Ld. DRP. 9.5 Further, Ld. DRP observed that this company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the list of comparables. Respectfully following the above order, we direct the AO/TPO to exclude L&T Infotech Ltd. from the list of comparables. 10. Next ground for our consideration is that assessee sought the inclusion of following comparables only. i. I2T2 India Limited ii. Melstar Information Technologies Ltd. Other comparables in ground No.12 is not pressed. Accordingly, dismissed as not pressed. I. I2T2 India Ltd.:- 11. The Ld. A.R. submitted that this company has to be included in the list of comparables on the following reasons:- * The TPO has erred in rejecting I2T2 India on the ground that Related Party Transactions ("RPT") data for FY 2014-15 is not available in the annual reports. * I2T2 India is functionally comparable and ought to be accepted. * I2T2 India qualifies all the filters applied by the TPO. 11.1 We have heard the rival submissions and perused the materials available on record. As rightly pointed out by the Ld. A.R., this company is considered as comparable in the case of LG Soft India Pvt. Ltd. cited (supra), wherein it was held as under:- "12. We find force in the contentions of Ld A.R. If the Annual report of this company does not me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record. The Ld. A.R. submitted that this company Melstar Information Technologies Ltd. is a loss making company in the last 3 continuous successive assessment years and if there is a profit in any one of the past 3 financial years, then that company cannot be excluded on the basis of persistent loss making filter. For this purpose, he relied on the order of the Tribunal in the case of KBACE Technologies Pvt. Ltd. Vs. Deputy Commissioner of Income-tax in IT(TP)A No.3189/Bang/2018 and he drew our attention to the following findings of the Tribunal:- 8. "As far as inclusion of 3 companies which was argued before us by the Id. counsel for the assessee, the first company which the assessee seeks for inclusion is Sagarsoft (I) Ltd. This company was rejected by the TPO by applying the RPT filter which was not accepted by the DRP. The DRP directed the TPO to consider the comparability of this company afresh. The TPO while giving effect to the order of DRP, chose to reject this company as a comparable by pointing out that this company fails the persistent loss filter. It was the submission of the Id. counsel for the assessee that that in the light of decision of ITAT Pune Bench in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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