TaxTMI 
TaxTMI 
2014 (12) TMI 893
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....case decided by the Tribunal in ITA No.1054/Bang/2011 for AY 07-08 in M/s. Trilogy E-Business Software India Pvt.Ltd. Vs. DCIT, Circle 12(4), Bangalore and 3DPLM Software Solutions Ltd. Vs. DCIT IT(TP) A.No.1303/Bang/2012 order dated 28.11.2013. It was also submitted that the business profile of the Assessee and that of the Assessee in the case of M/S.Trilogy E-Business Software India Pvt.Ltd. (supra) and 3DPLM Software India Pvt.Ltd. (supra) are also identical and that the decision rendered in 3DPLM Software India Pvt. Ltd., (supra) is also in relation to AY 08-09. This submission was found to be correct at the time of hearing. With this background we will now consider the factual basis of the present case and the decision rendered in the case of Trilogy E-Business Software India Pvt.Ltd. (supra). 3. The assessee is a company. It renders software development and system integration services to Bearing Point Group and its worldwide customers. It is not in dispute before us that the transaction of providing software development services by the Assessee to its group companies was an international transaction with the Associated Enterprise "("AE") and therefore the price at which th....
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....tment of -1.70%, the adjusted arithmetic mean was determined at 25.35%. The computation of the ALP by the TPO in this regard was as follows:- "Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B For details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmetic mean PLI 25.14% Less : Working capital adjustment (Annexure-C) -1.70% Adj. arithmetic mean PLI 25.35% Arm's Length Price: Operating cost (Rs. 47,81,73,205 + reimbursement of expenses of Rs. 50,65,558) Rs. 48,32,38,763 Arm's length margin 25.35% of the operating cost Arm's length margin (ALP) at 123.36% of operating cost Rs. 60,57,39,789 Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arm's length price (ALP) at 123.36 per cent. of operating cost Rs. 60,57,39,789 Price charged in the international transactions ....
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....y was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 8....... 9. Ce....
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....awn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of coordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the coordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list ....
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....under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development. The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 Per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas....
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.... the ground that its turnover was in excess of Rs. 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development 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 aforecited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, t....
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....9;s objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterpri....
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.... company providing software development services. In this regard our attention was invited to the decision rendered by the Bangalore Bench of ITAT in the case of M/S.3DPLM Software Solutions Ltd. (supra) wherein it was held as follows: "18. Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd.....
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.... from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The coordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of co....
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....uires to be omitted from the list of comparables. 19.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables as this company was a pure software development service provider like the assessee. 19.3 We have heard both parties and perused and carefully considered the material on record. We find that the coordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 has excluded this company from the set of comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2011. As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the coordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand." 19. Respectfully following the aforesaid decision of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that the aforesaid company should be excluded from the list ....
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....and development activities which has resulted in the 'Embedded Product Design Services Segment' of the company to create a portfolio of reusable software components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons, Tata Elxsi Ltd. is clearly functionally different / dis-similar from the assessee and therefore ought to be omitted form the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the stand of the TPO in including this company in the list of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd.....
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....and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage i....
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....t 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. 12. Wipro Ltd. 12.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons :- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a mark....
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....ase on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration." 23. Respectfully following the aforesaid decision of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that the aforesaid companies should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 24. The next aspect highlighted by the learned counsel for the Assessee was the improper computation of working capital adjustment by the TPO which was confirmed by the DRP. In this regard the TPO computed the working capital adjustment of -1.70% as per annexure-C to the order of the TPO u/s.92CA of the Act. Before the DRP, the Assessee submitted as follows:- "5.12. Working capital adjustment The learned TPO provided for the working capital adjustment of....
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....s been made on the basis of formula available in Annexure to the OECD Guidelines 2010. In this case, the PLR adopted by SBI, the largest scheduled Bank for short term working loans relevant for the FY i.e. 12.68% p.a. under consideration is considered. This ground is therefore rejected." 26. Before us it was pointed out by the learned counsel for the Assessee that the DRP has not applied its mind to the submissions made by the Assessee regarding the rate of PLR. The Assessee has given a calculation of working capital adjustment on that basis in respect of the comparable that remain after excluding companies referred to in the earlier paragraphs. The same is given as Annexure-I to this order. 27. The learned counsel for the Assessee has also given a margin tabulation and computation of ALP after working capital adjustment which is given as Annexures II and III to this order. 28. After considering the submissions of the parties, we are of the view that it would be just and appropriate to direct the AO/TPO to consider the issue of working capital adjustment in the light of Annexure-1 to this order and submissions made before DRP. The TPO/AO will thereafter verify the charts g....
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....provision, excess provision or no provision of earlier years." 32. The AO noticed that the assessee had debited a sum of Rs. 4,74,991 being prior period expenses. The AO called upon the assessee to explain as to why the same should not be disallowed. The assessee submitted before the AO that prior period expenses consisted of expenses relating to F.Y. 2006-07 relevant to A.Y. 2007-08, wherein provision for expenses were made short of the actuals during the previous year. When the assessee realized that the actual expenses were much more than what were provided in the books in the earlier financial year, the same was debited to profit & loss account. The assessee submitted that the same has to be allowed as a deduction. 33. The AO, however, rejected the claim of the assessee by observing that the assessee follows mercantile system of accounting under which it was required to make provision for such contingencies in the relevant financial year itself. The assessee not having made the provision properly, cannot claim the same in the subsequent assessment year. The AO ultimately held that the expenditure debited does not relate to previous year and accordingly disallowed the clai....