AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2016 (3) TMI 1242
X X X X Extracts X X X X
X X X X Extracts X X X X
....2.4, 2.6 and 2.7. Accordingly all other sub-grounds relating to TP issues are dismissed as not pressed. 04. Facts apropos are that assessee engaged in R & D services in the field of e-commerce, e-solutions, internet security and management, filed its return of income for the impugned assessment year declaring income of Rs. 54,94,29,613/-. Since value of the international transactions undertaken by the assessee during the relevant previous year exceeded the stipulated limit, reference was made to the TPO for analysing the ALP of such transactions with its AE. Assessee is a part of HP group and its ultimate holding company is Hewlett Packard Company, USA. It had operating revenue of Rs. 628,74,04,881/- against operating cost of Rs. 580,40,71,166/- resulting in a profit of Rs. 48,33,33,715/-, with a ratio of 8.33% as operating profit to operating cost. International transactions undertaken by the assessee during the relevant previous year as reported in its audit report were as under : International Transactions (as mentioned in the 92 CE report) Software Development Services Rs. 585,47,55,957/- Purchase of fixed assets Rs. 34,79,50,015/- Purchase of components ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lobal Solutions Ltd 747.27 7.49% 0 39.64 5.30% 10 Infosys Technologies Ltd 13149 40.30% 538/4.1% 664 5.05% 11 Ishir Infotech Ltd 7.42 30.12% 0 1.63 21.97% 12 KALS Information Systems Ltd (Seg) 2.00 30.55% 106/3% 0 0.00% 13 LGS Global Ltd (Lanco Global Solutions Ltd) 45.39 15.75% 0 1.22 2.69% 14 Lucid Software Ltd 1.70 19.37% 0 0 0.00% 15 Mediasoft Solutions Ltd 1.85 3.66% 0 0 0.00% 16 Megasoft Ltd 139.33 60.23% 26.47/19% 10.21 7.33% 17 Mindtree Ltd 590.35 16.90% 0 0 0.00% 18 Persistent. Systems Ltd 293.75 24.52% 2.16/0.73% 28.55 9.72% 19 Quintegra Solutions Ltd 62.72 12.56% 0 0 0.00% 20 R S Software (India) Ltd 101.04 13.47% 0 0.85 0.84% 21 R Systems International Ltd (Seg.) 112.01 15.07% 2.68/239% 12.77 11.40% 22 Sasken Communication Technologies Ltd (See.) 343.57 22.16% 0 3.94 1.15% 23 SIP Technologies & Exports Ltd 3.80 13.90% 0 0 0.00% 24 Tata Elxsi Ltd (Seg.) 262.5....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... so far as software development services of Hewlett Packard Global Soft P. Ltd, compared favourably with that of the assessee. According to him, this Tribunal had directed exclusion of Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E- Zest Solutions Ltd, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd, Lucid Software Ltd, Persistent Systems Ltd, Tata Elxsi Ltd (seg) and Wipro Ltd (seg), as not comparable being functionally different vide para 24 of the order mentioned supra. 09. Continuing his submissions, Ld. AR asserted that comparability of Megasoft Ltd, was also considered by this Tribunal in the above decision and the Tribunal had remitted this issue back to the AO / TPO for proper segmentation of its results. Further according to him, M/s. Flextronics Software Systems Ltd (seg) also had to be excluded by virtue of the finding appearing at para 28 of the decision in the case of Hewlett Packard Global Soft P. Ltd (supra). 10. Per contra, Ld. DR submitted that assessee could not show how it was functionally similar to the software development segment of Hewlett Packard Globalsoft P. Ltd (supra). ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the said case had also selected the very same set of 26 companies. Said decision being for the very same assessment year 2007-08, we are of the opinion that it can be taken as a good precedence for deciding the issue of comparability raised by the assessee herein, in so far as these companies are concerned. This Tribunal had observed as under : i) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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: "The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aceutical 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 company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany 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') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive infor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....son Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different 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 F.Y. 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which 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 Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS 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 assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the 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 E-Business 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 thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decision of the co-ordinate bench, we hold that these two companies are also to be excluded. 21. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. ix) 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 repot, the salary cost debited under the software development expenditure was Q 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/1O wherein....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ound 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 enterprises. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ow 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., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : " Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies." (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Propri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....res 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 comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider." 27. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. xii) Tata Elxsi Ltd. 14.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had obj....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, 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." 25. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. xiii) Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on 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, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO's own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product develo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the opinion that the issue of comparability of these three companies have to go back to AO / TPO for consideration afresh. However M/s. Avani Cimcon Technologies Ltd, Celestial Lab Ltd, E-Zest Solutions Ltd, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Thirdware Solution Ltd (seg) and Wipro Ltd (seg) have to be excluded by virtue of coordinate bench decision in the case of NXP Semiconductors India Ltd (supra). Comparability of M/s. Accel Transmatics Ltd (seg), M/s. Quintegra Solutions Ltd and M/s. Tata Elxsi Ltd (seg) is remitted back to the AO / TPO for consideration afresh as per law. Ordered accordingly. Accordingly we direct exclusion of Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E- Zest Solutions Ltd, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd, Lucid Software Ltd, Persistent Systems Ltd, and Wipro Ltd (seg), from the list of comparables. Comparability of M/s. Tata Elxsi Ltd (seg) is remitted back to the TPO / AO for consideration afresh in line with the directio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Blue Ally segment of the said company could be considered for comparison. Relevant findings of the Tribunal as it appears in the decision of NXP Semiconductors India Ltd (supra) is reproduced hereunder: Megasoft Ltd. : 24. This company was chosen as a comparable by the TPO. The objection of the assessee is that there are two segments in this company viz., (i) software development segment, and (ii) software product segment. The Assessee is a pure software services provider and not a software product developer. According to the Assessee there is no break up of revenue between software products and software services business on a standalone basis of this comparable. The TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius- BCGI Division does the business of product software. This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs.11,96,19,333 OP/TC (PLI) 23.11% 26. It was reiterated that in the given circumstances only PLI of software service segment viz., 23.11% ought to have been selected for comparison. 27. It was further submitted that the learned TPO in case of other comparable, similarly placed, had adopted the margins of only the software service segment for comparability purposes. Consistent with such stand, it was submitted that the margins of the software segment only should be adopted in the case of Megasoft also, in contrast to the entity level margins. 28. Computation of the net margin for Mega Soft Ltd. Is therefore remitted to the file of the TPO to compute the correct margin by following the direction of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd." 23. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to compute the correct margin of Mega Soft Ltd., as directed by the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. (supra). Accordingly, we direct that Megasoft Ltd, could be considered as a comparable only after proper segmentation in line with ....