TaxTMI 
TaxTMI 
2015 (5) TMI 637
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....n the industries such as Telecom & Mobile, Health care and Travel. The assessee, an Indian company, is engaged in the provision of software development services and also maintenance and repair work, testing, quality assurance and other information technology services to its overseas group companies. The assessee gets remunerated by its foreign AE with cost plus 15% mark-up. The assessee reported the international transaction of: 'Provision of software services' worth Rs. 93,64,04,329/-. The transactional net margin method (TNMM) was employed as the most appropriate method with Profit Level Indicator (PLI) of Operating profit to Total cost (OP/TC) for demonstrating that its international transaction was at arm's length price (ALP). The assessee declared its operating profit margin at 13.34%. Certain comparable companies were chosen with average of operating profit margin of 14.53% to indicate that the assessee's operating profit margin was within +/- 5% permissible range. The TPO, in the final analysis, chose the following 26 companies as comparable:- Sl.No. Company Name Working Capital adjusted OP/OC (%) 1. Accel Transmatic Ltd. (Seg.) 20.38 2. Avani Cimcon Technologies Lt....
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....functional profile of these companies is found to be similar and other relevant filters are also same that the question of comparability of these companies can be decided with a relative ease. Firstly, we are taking up Motorola Solutions India Pvt. Ltd., a copy of order in whose case is available at pages 308 onwards of the paper book. The functional profile of Motorola Solutions India Pvt. Ltd., which is a leading supplier of mobile phones and equipments of mobile broadband and automobile networks, has been set out by the Tribunal in its order dated 14.8.2014. It is manifest from para 3 of the order that this company undertook four types of international transactions, viz., (a) Provision of software development service; (b) Provision of administrative and market support services; (c) Distribution of telecom equipments and handsets; and (d) Reimbursement of expenses from group companies. Segmental results were declared by this company and we are basically concerned with the first segment, namely, 'Provision of software development services', which prima facie appears to be matching with the assessee's business. Para 32.1 of the order indicates that this company in the 'Software dev....
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....s well, we will exclude such company by adopting the same reasons as have been given by the Tribunal in the respective orders passed in these two cases. We will espouse one by one the companies which have been contested by the ld. AR in the present appeal. (i) Avani Cimcon Technologies Ltd. 9. The TPO observed on page 89 of his order that this company is also a software development and consulting company. In his opinion, all the filters applied by him were fulfilled and, as such, this company was liable to be considered as comparable. The assessee objected to the inclusion of this company before the DRP by contending that not only the turnover of this company was much lower, but also the profits were extremely high. Rejecting the assessee's contentions, the DRP upheld the TPO's view on the inclusion of this company in the final set of comparables. 10. It can be seen from the Annual accounts of this company, a copy of which is available on record, that albeit it is a pure software development service provider, but, is utilizing its own softwares in rendering such services. The Tribunal in Motorola Solutions India Pvt. Ltd., has held this company to be incomparable by accepting th....
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....ed opinion, there can be no comparison with the overall entity level functions of this company with that of the assessee. The Tribunal in both the cases, namely, Motorola Solutions India Pvt. Ltd., and Toluna India Pvt. Ltd., has directed to exclude this company from the roll of comparables. Respectfully following the precedent, we direct not to treat this company as comparable. (iii) Flextronics Software Systems Ltd. 13. The TPO observed this company qualified all the filters applied by him. He noticed that the products and service segment of this company to be comparable inasmuch as product revenue constituted only 10.87% of the total segmental revenue at Rs. 847.2 crore. This percentage was found to be not material. No relief was allowed by the DRP on this issue. 14. It can be noticed that the 'Product and service segment' of this company, which has been considered by the TPO for the purposes of inclusion in the list of comparables comprises income from both the streams, namely, software products as well as software services. What is the impact of the software products on the overall profitability of this company under this segment cannot be ascertained. As the assessee is s....
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....tware products, software services and training and, further, no break up of these three was available. 20. It can be observed that the revenues of this company under the segment taken by the TPO include not only Software development services, but also Training. Since the assessee is only engaged in rendering software development services without carrying out any specific commercial training activity, we fail to appreciate as to how this company on a segmental level, consisting of revenues from both Software development and Training, can be considered as comparable. Unless the split of these two sub-segments is available, the inclusion of the overall segment comprising revenues from Training as well, cannot be justified. Similar view has been taken by the Tribunal in the case of Motorola Solutions India Pvt. Ltd. (supra) and Toluna India Pvt. Ltd. (supra). (vii) Lucid Software Ltd. 21. The TPO included this company despite the assessee's objections by noticing that it was into pure software development and did not have any revenue from sale of products/licences. 22. It can be seen from the Annual report that this company is valuing the software products developed in-house on the....
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.... accordingly. (x) Sasken Communications Ltd. 27. Here again, we find that in this year, there were acquisitions and mergers. The Tribunal in the case of Toluna India Pvt. Ltd., has also directed the exclusion of this company on the same basis. Following the same, we direct not to treat this company as comparable. (xi) Tata Elxsi Ltd. 28. The TPO considered this company as comparable despite the assessee's objections. 29. We find that this company has two main segments, namely, Software development and services and System integration services. The TPO has adopted 'Software development and services' segment which, in turn, consists of three sub-segments, namely, Embedded product design services (design and development of hardware and software), Industrial design and engineering (mechanical design with a focus on industrial design) and Animation and Visual Effects. Since this company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable to the assessee company which is simply providing software related services. The Tribunal in the case of Toluna India Pvt. Ltd., and Motorola Solutions India Pvt. Ltd., has treated this company as ....