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TMI Blog2019 (9) TMI 1686X X X X Extracts X X X X X X X X Extracts X X X X ..... the information called for. 2.1 After verification of the information, the AO referred the matter to TPO u/s 92CA of the Act, for determination of arm's length price in respect of international transaction reported by the assessee for the AY 2011-12. 3. International transactions: AE Nature of transaction Amount (Rs.) GE Healthcare Receipt for provision of software development services 49,007,274 GE Healthcare Receipt for provision of IT enabled services 8,418,000 3.1 Examination of TP study conducted by assessee: The assessee has carried out the economic analysis and has summarized it as under: Nature of international transaction Amount (Rs.) MAM PLI Margin of taxpayer (%) Margin of comparables (%) Contract software development services 49,007,274 TNMM OP/TC 10.19% 13.08% IT enabled services 8,418,000 TNMM OP/TC 10.19% 13.42% 3.2 Financial analysis of the assessee: As per the audited statement of accounts, the financials of the assessee for the AY 2011-12 are as under: For Software development segment: Operating revenue Rs. 49007274 Operating Cost Rs. 44762984 Operating Profit Rs. 4244290 OP/TC 8.66% OP/Sales(PLI) 9.48% For IT enabled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following comparables, which included 5 common companies identified by the assessee in the TP study: S.No. Name of company OP/TC (Pre WC Adj) % 1 Accentia Technologies Ltd. 29.29 2 Acropetal Technologies Ltd. (Seg.) 15.57 3 Cosmic Global Ltd. 9.81 4 Crossdomain Solutions P. Ltd. 25.04 5 e4e Healthcare 16.60 6 eClerx Service Ltd. 69.78 7 Informed Technologies Ltd. 9.24 8 Infosys BPO Ltd. 18.85 9 Jeevan Scientific Technologies Ltd. 28.93 10 Jindal Intellicom Ltd. 13.54 11 Mastiff Tech P. Ltd. 21.78 12 Microgenetic Systems Ltd. -0.22 13 TCS E-serve Ltd. 76.28 Arithmetic Mean 25.73 Particulars Amount (Rs.) Total operating income (OR) 84,18,000 Total operating cost (OC) 76,88,957 Operating profit (OP) 7,29,043 OP/OC (%) 9.48 3.7 Computation of arm's length price by TPO and the adjustment made as under: Arm's length mean margin on cost 25.73% Less: Working capital adjustment 2.19% Adjusted mean margin of the comparables A 23.54% Operating Cost B Rs. 76,88,957 Arm's length price (116.93% of operating cost) C=B*123.54% Rs. 94,98,937 Price received D Rs. 84,18,000 Shortfall being adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, is erroneous on facts and bad in law and is liable to be quashed. 2. That the learned AO/ DRP erred both in facts and in law in making an adjustment of INR 29,58,074/- to transfer price (TP') in the international transaction relating to software development services ('SWD') segment and an adjustment of INR 5,55,782/- to transfer price in the international transaction relating to Information Technology enabled services ("ITES") segment of the Appellant. Consequently, the learned AO/learned DRP has erred in considering the total TP adjustment of INR 35,13,856/- as addition to the income returned by the Appellant. 3. That the learned AO/ DRP erred in upholding the rejection of the TP documentation maintained by the Appellant in respect of the SWD and ITES segments of the Appellant invoking the provisions of section 92C(3) of the Act and contending that the information or data used in the computation of the arm's length price is not reliable or correct. 4. That the learned AO/ DRP erred both in facts and in law in holding that the international transactions in the SWD segment and in the ITES segments of the Appellant does not satisfy the arm's length p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocumentation and for the determination of comparables while conducting the search for the SWD and ITES segments without providing an opportunity of hearing to the Appellant. i) Arbitrary adoption of certain filters for the determination of com parables while conducting the search for the SWD and ITES segments. j) Considering certain expenses/income as non-operating in nature while computing the mark-up on cost ('Operating Profit/Total cost' or ('OP/TC') of certain companies while performing the comparability analysis in relation to the SWD and ITES segments and in doing so the learned AO/ DRP have failed to provide any cogent reason to substantiate their findings. k) Considering certain expenses/income as operating in nature while computing the mark-up on cost ('Operating Profit/Total cost' or ('OP /TC') of certain companies while performing the comparability analysis in relation to the SWD and ITES segments and in doing so the learned AO/ DRP have failed to provide any cogent reason to substantiate their findings. l) Computation of operating mark-up on cost (OP /TC) for certain companies while performing the comparability analysis in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems for FY 2010-11 is Rs. 610.12 crores which is 13 times the turnover of Appellant Revenue Recognition: Revenue from licencing of products is recognised on delivery of products Revenue from royalty is recognised on sale of products in accordance with the terms of the relevant agreements. Revenue from maintenance contracts are recognised on a pro-rata basis over the period of the contract as and when services are rendered. Outsourced Product Development: The Company is engaged in outsourced product development (OPD') which is different from software development services. It has been recognized and awarded as a leading global outsourced product development vendor. Further, the Company in its financial statement for FY 2009-10, gave a broad understanding of its business of OPD whereby it stated that its different from IT Services." 6.2 Ld. AR relied on the following decisions where Persistent Systems was excluded based on functionality: * Conexant Systems (P.) Ltd. vs. DCIT [(2018) 91 taxmann.com 308 (Hyd)] (AY 2011-12) - Para no. 6.1 and 9 on page 3 and 4 * Symantec Software & Services India (P) Ltd. [(2017) 79 taxmann.com 208 (Chennai)] (AY 2011-12) - Para 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. was excluded based on functionality: * S & P Capital IQ (India) (P) Ltd. [(2016) 72 taxmann.com 326 (Hyd)] (AY 201112) - Para 14 Page 14 & 15 * Hyundai Motors India Engineering (P) Ltd. [(2015) 152 lTD 112 (Hyd)] (AY 2008-09) - Para 7.1 Page 10 * Market Tools Research (P) Ltd. [(2014) 148 ITD 631 (Hyd)] (AY 2008-09) - Para 11 & 12 Page 9 * Symphony Marketing Solutions India (P) Ltd. [(2013) 27 ITR(T) 753 (Bang)] (AY 2008-09) - Para 18 & 19 Page 11 * Cummins Turbo Technologies Ltd. [(2016) 68 taxmann.com 273 (Pune)] (AY 2009-10) - Para 15 to 17 Page 9 to 11 * Vertex Customer Services India (P) Ltd. [(2016) 69 taxmann.com 301 (Del)] (AY 2009-10) - Para 24 Page 11 * BNY Mellon International Operations (India) P. Ltd. [(2015) 173 TTJ 354 (Pune)] (AY 2009-10) - Para 15 Page 8 7. Ld. DR, on the other hand, brought to our notice page 103 & 107 of appeal papers i.e. TPO's order, in which, ld. DR appreciated the findings of the TPO relating to Persistent Systems. In this connection, he referred to para 21 of the case law, i.e., Advice America Software Development Center (P) Ltd. Vs. ITO, 94 Taxmann.com 179 (Bengaluru - Trib.). Further, he brought to our notice pages 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been adopted by the TPO at entity level, we, therefore, order for the exclusion of this company from the list of comparables. vi) Sasken Communications Technologies Ltd. 15.1. The TPO included this company in the set of comparables despite the assessee's objection that it was functionally different and also had Product portfolio. 15.2. After considering the rival submissions, we find from page 58 of the TPO's order that he has recognized sale of software products to the tune of Rs.37 crore and odd. Though the break-up of revenue from software services and software products is available, but, the break-up of operating costs and net operating revenues from these two segments have not been given. It is further observed that the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee's contention is accepted on this issue. Following the said decision, we direct the AO/TPO to exclude the said two companies from the list of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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