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TMI Blog2021 (6) TMI 1164X X X X Extracts X X X X X X X X Extracts X X X X ..... me at Rs. 1,44,71,721 as against the returned income of Rs. 29,240; 2. The learned AO I Transfer Pricing Officer (TPO') and the Honble DRP have erred, in making an addition of Rs. 1,31,78,142 to the total income of the Appellant on pretext that price charged was lower than arm's length price determined for provision of software development services transaction rendered by Appellant to its AE(s); 3. The learned AO/TPO and the Hon'ble DRIP have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (the Rules'), and in conducting a fresh economic analysis for the determination of the arm's length price ('ALP') in connection with the impugned international transaction, and holding that the Appellant's international transaction is not at arm's length; 4. The learned AO/TPO and the Hon'ble DRIP have erred, in law and in facts, by determining the arm's length margin/price using only FY 2006-07 data though the same was not available to the Appellant at the time of complying with the transfer pricing documentation requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cs Software Systems Limited (Seg.) f) Ishir Infotech Limited g) KALS Information Systems Limited (Seg) h) Lucid Software Limited i) Tata Elxsi Limited Se j) Thirdware Solutions Limited k) Wipro Limited (Seg) 7.2 Without prejudice to transfer pricing documentation, 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, the learned AO/DRP/TPO has erred in law and in facts by considering them as comparable companies: a) Helios & Matheson Information Technology Limited b) Infosys Technologies Limited 8. The learned AO/DRP/TPO and the Hon'ble DRP have erred in wrongly computing the operating profit margin of the comparable companies identified in the TIP order; 9. The learned AG/TPO and the Hon'ble DRP have erred in not making suitable adjustments on account for differences in the risk profile of the Appellant vis-à-vis the comparables, while conducting comparability analysis; 10. The learned AO/TPO and the Hon'ble DRP erred in computing the arm's length price without giving the benefit of +/- 5 percent under the proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing 26 comparables with average margin of 25.14%: Sl. No. Comparables Margin Margin 1. Allsec Transmatic Ltd (SEG) 18.91% 2. Avani Cincom Technologies Ltd 49.97% 3. Celestial Labs Ltd 53.06% 4. Datamatics Ltd -1.81% 5. e-Zest Solutions Ltd 34.85% 6. Flextronics Software Systems Ltd (SEG) 23.85% 7. Geometric Ltd (SEG) 8.42% 8. Hello and Matheson Information Technology Ltd 33.23% 9. iGate Global Solutions Ltd 4.42% 10. Infosys Technologies Ltd 37.76% 11 Ishier Infotech Ltd 29.20% 12. KALS Information Systems Ltd 22.22% 13. LGS Global Ltd 13.95% 14. Lucid Software Ltd * 15.84% 15. Mediasoft Solutions Ltd 0.39% 16. Megasoft Ltd 0.12% 17. Mindtree Ltd (TP study comparable) 4.16% 18. Persistent Systems Ltd 2.23% 19. Qtintengra Solutions Ltd 8.04% 20. RS Software India Ltd 1.93% 21. R Systems International Ltd (SEG) 2.04% 22. SaskenCommunications Technologies Ltd (SEG) 9.88% 23. SIP Technologies and Exports Ltd (TP study comparable) 9.50% 24. Tata Elxsi Ltd (Seg.) 4.96% 25. Thirdware Solutions Ltd 0.32% 26. Wipro Ltd 3.27% Average ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As is common in the case of software service provider companies, the technical manpower employed and trained by a company is its most important asset. Assessee also deploys well qualified workforce in its business. Besides that, assessee also owns Computers etc., which are essential to the business of a software development company. The asset profile of the company is given as under in the TP Report Sl No Type of assets Net Block Value (Rs.) as on 31.3.07 1 Computers 53,02,465 2 Office Equipment 50,81,436 3 Furniture & Fixture 36,73,214 4 Vehicles 1,50,206 5 Leasehold improvements 62,09,772 Total 2,04,17,093 10.3. Risks It is claimed by assessee that, being a captive service provider and being compensated at cost plus 10%, the assessee does not bear the risks like market risk, financial risk, credit & collection risk and service liability risks which are normal in the case of independent entrepreneurs. The risk profile of the taxpayer vis-à-vis. other comparables has been dealt with in later part of this order under the head "Risk Adjustment". 10.4. The Ld. TPO thus observed that the assessee is a captive service provider com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k the view that the functional comparability of the companies were alone to be seen and turnover was not an important criterion. In ground No. 5(iv), the assessee has challenged the order of DRP in holding that higher turnover is not a relevant criterion for disregarding a company, when it is functionally found to be comparable. The question boils down on application of turnover filter in choosing comparable companies. As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263. This Tribunal in case of Autodesk India (P.) Ltd. v. Dy. CIT (supra) decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores to 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:-- "17.7 We have considered the rival submissions. The substantial question of law (Question No. 1 to 3) which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incuriam as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S. NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incuriam. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion for in-house R & D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act." * As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred." An amount of Rs. 11,692,020/- has been debited to the Profit and Loss Account as "Deferred Revenue Expenditure" (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R & D activities is bad in law. 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No. 6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard." 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that this company ought not to have been considered as comparable." E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand. The A.O./TPO is accordingly directed." KALS Information Systems Ltd. "46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04-ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. This comparable was included by Ld. TPO and objected by assessee for its functional dissimilarities. It has been submitted that, this company is involved in R & D with leading scientific institutions. Ld. Counsel submitted that, this Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. Vs. DCIT ITA (TP) No. 1086/Bang/2011 for AY: 2007-08 held that, this company is not comparable in case of software development services provider. The nature of services rendered by assessee in present appeal and the assessee in case of First Advantage Offshore Services Pvt. Ltd., (supra) are one and the same. This fact would be clear from the fact that very same 26 companies were chosen as comparables in case of the assessee as well as in case of First Advantage Offshore Services Put. Ltd., (supra). Ld. Counsel submitted that, this company is to be excluded from the list of comparables on the basis of finding of this Tribunal in case of First Advantage Offshore Services Put. Ltd., (supra). He submitted that, facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. The Ld. DR however objected to the exclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sun and substance, the plea set up b% the aforesaid concerns are engaged in development & and sale of software products which is functionally from the services undertaken by the assessee in its IT-services segment. 17. As per the discussion in para 6.3.2. of the order of The TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for P.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services. 20. With regard to the inclusion of Hellos & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of Y-4-LS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position ..... X X X X Extracts X X X X X X X X Extracts X X X X
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