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TMI Blog2017 (3) TMI 1933X X X X Extracts X X X X X X X X Extracts X X X X ..... development services. Onsite development should not be a criteria to judge comparability. Onsite revenue is not one of the filters adopted by the TPO in the order. Persistent Systems Solutions Ltd be included as per notes to accounts, the company is predominantly engaged in providing software development services to its global customers. As per revenue recognition, the company derives income from software services. Nature of Donation - operating or non operating - assessee submitted that donation is not closely linked to the business operations and should be considered as nonoperating in nature - HELD THAT:- As decided in the case of M/s. Capital One Services India P. Ltd [ 2015 (4) TMI 1359 - ITAT BANGALORE] wherein it has been held that donation is not in the nature of normal business activity and hence should not be considered as operating. Following the decision, the AO is directed to treat donation as non operating one. Risk adjustment seeked on the basis of additional ground - assessee submitted that suitable adjustment should be provided to account for differences in risk profile of the comparables - HELD THAT:- AR submitted that the TPO is not against granting any risk adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis undertaken by the assessee. In his TP order dt.29.01.2014, he retained 7 comparables chosen by the assessee , introduced 4 new comparables and computed the average net margin of the comparables at 21.22 % on operating cost (after undertaking a working capital adjustment of 1.49%) as against 11.26% originally computed by the assessee . Accordingly, the TPO made an addition of Rs.1,66,67,453/- to the total income in connection with its international transaction. 05. On the assessee's objections, the DRP has rejected the objections on filter specific grounds of upper turnover filter, application of different financial year ending, employee cost filter and export earning filter. With respect to the comparable specific arguments, the DRP rejected the contentions on the comparables selected by the assessee in its TP documentation and on the additional comparables. On the comparables selected by the TPO, the DRP upheld the assessee's contentions on exclusions of comparables viz ICRA Techno Analytics Ltd, Infosys Technologies Ltd, Kals Info Systems Ltd & Tata Elxsi Ltd. Further, the DRP, suo-moto, excluded two comparables , viz R S Software Ltd & Persistent Systems Ltd, which we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 11.2 Before us, the assessee contended that this company is not functionally comparable, as it is into software products. The assessee had also submitted that :- (i) this company has two segments namely ; Application Software Segment which includes software product revenues, while the 'Training Segment' does not have any product revenue. (ii) from the Annual Report of KALS for the year ended 31.3.2008; i.e. the year under consideration, it is observed that the company is into provision of software development services as well as sale of software products. "Inventories" under schedule to the financial statements on page 16 of the Annual Report discloses "Software Development" as inventory and work-in-progress. It is to be noted that a pure software development service provider would not be able to disclose such details as it does not carry any such inventory or work-in-progress. "Background" under the Schedules to the financial statements on page 18 of the Annual Report states :- " The company is engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well. At the same time, we find that the TPO has drawn conclusions on the basis of information obtained under section 133(6) of the Act, which was not in the public domain and could not have been used by the TPO, when the same is contrary to the Annual Report of the company as has been highlighted by the assessee in its submissions. We also find that the co-ordinate bench of this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has held that this company was developing software products and was not purely or mainly a software development service provider. Further, apart from relying on the decision of Trilogy E-Business Software India Pvt. Ltd. (supra), the assessee has brought on record substantial evidence quoting from various portions of the Annual Report of that this company is functionally dis-similar and different from the assessee and hence is not comparable and therefore the finding rendered in respect of this company in the case of Trilogy E-Business Software India Pvt. Ltd. for Assessment Year 2007-08 is applicable for this year i.e. Assessment Year 2008-09 also. In view of the facts and circumstances of the case as discussed above, we hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy EBusiness Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. The argument put forth by assessee's is that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. ..................................................................................................... ..................................................................................................... ...................................... 14.0 (6) Tata Elxsi Ltd. 14.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 9.2. Now, let us examine the relevant portion of the order of this Tribunal in DCIT v. Ikanos Communication India P. Ltd in ITA No.137/Bang/2015 for ay 2010-11 dt 10.11.2015, which was providing contract software development services to its principal, as under: "04. Vide its ground 4, grievance raised by the Revenue is that DRP directed exclusion of M/s. Infosys Ltd, M/s. ICRA Techno Analytics Ltd, M/s. Kals Information Systems Ltd and M/s. Persistent Systems Ltd from the list of comparables considered by the TPO for analysing the pricing of the international transactions of the assessee with its Associated Enterprises (AE). 05. Ld. DR submitted that assessee was providing contract software development services to its principal at USA, called Ikanos Communications Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order : 22. Ground No.2 pertains to rejection of Infosys Technologies Ltd., from the list of comparables by DRP. We have already considered the opinion of DRP which is consistent not only in Assessee's case but also in the case of M/s. Sumtotal Systems India Pvt. Ltd., (supra), extracted above while considering the exclusion of L&T Infotech Ltd. Since DRP's decision is consistent with the stand taken by the Revenue in other cases and also by the ITAT in a number of cases on reason o f turnover , brand equi ty, functional dissimilari ty , we are o f the opinion that DRP is correct in excluding the above company from the list of comparables . Therefore, there is no merit in the Revenue's ground and the same is rejected. Accordingly we are of the opinion that DRP was justified in directing exclusion of Infosys Ltd from the list of comparables. 08. Assailing the direction of the DRP directing exclusion of ICRA Techno Analytics Ltd, Ld. DR pointed out that assessee had cited functional incompatability for excluding this company before the TPO. As per the Ld. DR, Directors' report of the said company mentioned that it was providing technology solutions and the servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware product of its own, but was only providing software development services to other parties. According to him, conclusion of the DRP that it was into product development and not providing software development services was incorrect. 12. Per contra, Ld. AR supported the directions of the DRP. 13. We have perused the orders and heard the rival contentions. In the annual report for F. Y. 2009-19 of Kals Information Systems Ltd, background of the said company has been mentioned as under : 14. Said company was having significant inventory coming to 27% of its current assets. Inventory held by Kals Information Systems Ltd came to Rs.60,47,977/-. We also find that Hyderabad bench in the case of Pegasystems Worldwide India P. Ltd (supra) had held as under at para 10.1 of its order vis-à-vis the comparability of M/s. Kals Information Systems Ltd : 10.1. Assessee's main objection before us is on functionality of the comparable company. As seen from the annual report of 2008-09 and 2009-10 and comparative statement placed by Assessee, the company classified itself as 'the company engaged in development of software and software products since its inception'. The company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the DRP assessee had stated that the said company was engaged in outsourced product development services and not into software development services. Annual report of Persistent Systems and Solutions, states as under : It is also mentioned that they were providing out-sourced product development services and significant portion of its revenue was from export of software services as well as products. In the P & L account for the year ending 31.03.2010, revenue from sale of software services and products came to Rs.5,044.13 millions. There was no segmentation of the results into software services and software product development. Thus segmental results were not available and the assessee has also shown that M/s. Persistent Systems & Solutions Ltd, was developing products like paxpro, ChemLMS, VieMOR, CLAP, e2GMigrator, TLALOC, eMee. In such a situation we are of the opinion Ld. DRP rightly directed exclusion of Persistent Systems and Solutions Ltd from the list of comparables. DRP has also given a finding that assessee was rendering contract software development services to its principal abroad and such services were provided by it through projects and assignments contracted to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue and requested to restate the above comparables in the final set of comparables . Accordingly, the TPO/AO is directed to include them. The Revenue's ground no 7 and the ground no 4 of the assessee's CO are allowed. 11. The next issue is seeking inclusion of the following 5 comparables (Ground no.5 of the assessee's additional ground ). The gist of the AR's submissions are as under : 1. Akshay Software Technologies Ltd : The DRP's reasons for exclusion are : Predominantly engaged in onsite development of software & Abnormal employee cost of 87%. The assessee's reasons for inclusion are : • The company is engaged in the provision of software development services. Onsite development should not be a criteria to judge comparability. • Onsite revenue is not one of the filters adopted by the TPO in the order. • Threshold for employee cost filter applied by TPO is 25%, hence it passes the filter. 2. Goldstone Technologies Ltd : The DRP's reason for exclusion : Export turnover is 67%, which is less than the threshold of 75% applied by the TPO. The assessee's reasons for inclusion are : • TPO and DRP have considered the earnings in foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-operating in nature and hence not relevant. The segment titled 'Others' can be considered as comparable which represents software support, maintenance and consulting related activities and hence functionally comparable. The AR took us through relevant pages in the paper book. We have heard the rival submissions. Since these inclusions are sought on the basis of the additional grounds, these issues are remitted back to the TPO/AO for re-adjudication in accordance with law. 12. The next issue argued on the basis of additional ground is that the donation is to be considered as non-operating in nature In this regard, the assessee submitted that donation is not closely linked to the business operations and should be considered as nonoperating in nature. The assessee placed reliance on the decision of this Tribunal in the case of M/s. Capital One Services India P. Ltd [IT(TP)A No.28/Bang/2014], wherein it has been held that donation is not in the nature of normal business activity and hence should not be considered as operating. Following the decision, the AO is directed to treat donation as non operating one. 13. The next issue argued is seeking Risk adjustment on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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