TaxTMI 
TaxTMI 
2017 (8) TMI 913
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....in international transactions in Form No.3CEB. For the purposes of transfer pricing analysis, the assessee divided its business into three broader categories, viz., (i) Software Development; (ii) Software Deployment, Training, Consultancy and Equipment Rental; and (iii) Support Services which include licence fee paid and support and maintenance fees paid. In respect of 'Software Development Services', the assessee used Transactional Net Margin Method (TNMM) as the most appropriate method with Profit Level Indicator (PLI) of Operating Profit to Total Cost (OP/TC). The assessee computed its own PLI at 9.81% as against that of comparables at 12.06% and claimed that the international transaction of 'Provision of software development services', transacted at Rs. 5,45,05,847/-, was at arm's length price (ALP). The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price of the international transactions. The TPO did not dispute the category-wise accounts drawn up by the assessee in the above referred three segments and went on to analyze the same. As regards the international transactions relating to 'Software Development Services....
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....er pricing study report, the ld. AR brought to our notice that Aircom was established in 1995 in UK by a group of leading cellular communication specialists to satisfy the demands of network operators and infrastructure suppliers for expert mobile network engineering services and software tools. Aircom group provides solutions for three key areas viz., Consulting, Software and Training. Aircom 'ENTERPRISE suite' is a PC based solution for all aspects of network engineering. It includes tools for radio planning, backhaul/core planning and performance engineering and configuration management. ENTERPRISE suite offers the advantage of seamless working management between disciplines throughout the organization and avoids the data transfer problems. The assessee develops software as per the requirements of Aircom, UK. Software developed by the assessee act as inputs for the ENTERPRISE suite of products which are sold/licensed by the Aircom group worldwide. As per the transfer pricing study report, the functions performed by the assessee include design of the software and its development. With the above general backdrop of the nature of activities carried out by the assessee under the 'Pr....
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....nnot, act as a deterrent from challenging the fact that this company is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has held that a case which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. Similar view has been upheld by the Hon'ble Delhi High Court in Xchanging Technology Services India Pvt Ltd [TS-446- HC-2016(DEL)-TP]. The Hon'ble Bombay High Court in Tata Power Solar Systems Ltd [TS-1007-HC-2016(BOM)-TP] and the Hon'ble Punjab & Haryana High Court in CIT VS. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P&H) have also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR. 8. At this stage, it is also essential to deal with a submission advanced by the ld. AR, which is common to most of the companies under challenge, to the effect that certain Benches of the Tribunal in other cases have held them to be not comparable. In that view of the matter, it was u....
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....r passed in the case of company 'B', does not per se make it incomparable in all the subsequent cases to follow. Not only company 'A' held to be incomparable to company 'B' can be comparable to company 'C', but company 'X' held to be comparable to company 'Y' can also be incomparable to company 'Z', depending upon the functional profile and the applicability or otherwise of the related factors. Thus, it is clearly deductible that if a particular company has been held to be not comparable in the case of another company, then such former company may not always be non-comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile and the relevant reasons of the other company. Ergo, this preliminary contention raised on behalf of the assessee is rejected as devoid of merits. 10. We would also deal with another preliminary legal contention raised by the ld. AR. It was submitted that the TPO, during the course of proceedings before him, received information u/s 133(6) of the Act from various companies. Relying on such information, the TPO made certain inclusions/exclusions from the list of comparables which....
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....parable with the assessee company. It is possible that sometimes important information concerning the exact functional profile or that of a relevant segment may not be available in the database or may not emanate from the annual report available in the public domain and such missing information is essential. Similarly, there may be a lack of proper disclosure of the related party transactions or any other information necessary for determining the comparability. Some otherwise comparable companies may have a different financial year ending and sometimes it becomes essential to obtain the data for the year matching with the assessee. Similarly, there may be several other situations warranting collection of information from the companies u/s 133(6) of the Act. The information so collected can always be lawfully used for or against the assessee provided the assessee is confronted with such information and has been given opportunity of explaining its stand on the same. If the information so collected by the TPO u/s 133(6) of the Act has been confronted and the assessee given an opportunity to explain its position qua such information, there can be no fetter on the powers of the TPO to v....
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....nse to notice u/s 133(6), replied to the TPO as under:- "5. Customization of Software: We are Pure Software Development Service Provider so Point No.6 is Nil or Not Applicable. Software Development Process: We are Pure Software Development Service provider and Software Description is attached as per Exhibit 3. Description of Business Activity: Avani Cimcon Technologies is in providing software development and consulting IT services to our international clients. We utilize proven technologies to enable customer's business systems. This technology focus has given us the opportunity to become proficient on a wide variety of industry leading tools as well as gaining experience with most database platforms. We are concentrating on Internet enabled business information systems in a wide range of industries." 14.3. The above extraction has been reproduced from page 83 of the TPO's order. This company clearly described its business activity as: "providing software development and consulting IT services" to its international clients. It is obvious from the reply tendered by this company that it is engaged in providing software development and also consulting IT....
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....eceived in response to notice u/s 133(6), the TPO found that this company to be engaged in software development services and qualifying all the filters applied by him. The assessee objected to its inclusion on the basis of functional differences. Not satisfied, the TPO considered it as comparable. Now, the assessee is before us challenging the inclusion of this company. While briefly dealing with the functional profile of the assessee supra, we have noticed that 'ENTERPRISE suite' is a PC based solution for all aspects of network engineering including tools for radio planning, backhaul core planning and performance engineering and configuration management. It is not disputed that the ENTEPRISE suite is a very complex software solution. The software developed by the assessee, after designing, acts as an input for the ENTERPRISE suite which is sold/licensed by the Aircom group. Thus, it becomes palpable that the assessee is engaged in providing high end technical services, which are akin to the KPO services. The contention of the ld. AR that the assessee is involved in rendering BPO and not KPO services is clearly unsustainable for the nature of work carried out by it as discussed he....
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.... such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon'ble Delhi High Court held Infosys Ltd. to be non-comparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are similar to the extent that the extant assessee is also not owning any branded products and having no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt that Infosys Technologies Ltd. is not comparable with the assessee company. Respectfully following the judgment of the Hon'ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables. (v) Kals Information Systems Ltd. (Seg.) 18.1. This company was offered by the assessee. However, during the course of the proceedings before the TPO, the assessee objected to its inclusion. The assessee submitted th....
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....4%. On the contrary, it has been mentioned in the Notes to the financial statement that: "the company is engaged in development of software and software products since its inception." The company consisting of STPI unit is engaged in software products and development of software and is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. It is clear that the assessee is not providing any training under this segment, which has been rather included by the assessee in the second category of the assessee's business, namely, 'Software Deployment, Training, Consultancy and Equipment Rental.' Since the assessee's activity under this segment does not include any revenue from training, but the revenue of Kals Information Systems Ltd., for the purpose of comparison includes income from training, this company ceases to be comparable with the assessee's segment of 'Software development services'. Similar view has been taken by the Tribunal in the assessee's own case for the immediately preceding assessment y....
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....re development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. Vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Respectfully following the precedents, we order for the exclusion of this company from the list of comparables. (vii) Quintegra Solutions Ltd. 20.1. The assessee initially treated this company as comparable in its TP documentation. The TPO obtained information from this company which transpired that it was into software development services. The assessee objected to the same by contending that it had certain peculiar economic circumstances. Not convinced with the assessee's submissions and considering the information obtained from this company u/s 133(6) of the Act, the TPO treated it as comparable. The assessee is aggrieved. 20.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it has 'Copyrights' included in its Schedule of f....
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....ly, 'Software development and services segment' and 'Systems integration and support segment.' Noticing the segmental details, the TPO considered 'Software development and service segment' as comparable. The assessee's objections against the incomparability were set aside. The assessee remained unsuccessful before the DRP as well. 22.2. After considering the rival submissions and perusing the relevant material on record, we find that the TPO has adopted 'Software development and services' segment which, in turn, consists of three sub-segments, namely, Product design services (design and development of hardware and software), Innovation design and engineering (mechanical design with a focus on industrial design) and Visual Computing Labs (Animation and Visual Effects). Since this company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable with the assessee company, which is simply providing software related services. The Tribunal in Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions India Pvt. Ltd. (supra), both of which were rendering software development services, has treated this company as func....
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.... circumstances of Wipro Ltd., are somewhat similar to Infosys Technologies Ltd., inasmuch as he has proceeded to reject the assessee's objections by relying on the reasoning given by him for the inclusion of Infosys Ltd., which we have held to be incomparable in an earlier para. It is further observed that Wipro Limited (Seg.) was considered as comparable by the TPO in the case of Toluna India (supra) and Lear Automotive (supra). The Tribunal, in both the cases, has held Wipro Ltd. (Seg.) as not comparable. This company is operating as a full-fledged risk taking entity; engaged in providing technology infrastructure services, testing services, package implementation having more than 82,000 employees. It has its own R&D centre. It incurred around 11% of net sales as expenditure on research and development. None of the above factors match with the assessee company. Respectfully following the above precedents, we hold that this company is not comparable. 24.3. There is another reason for holding this company as incomparable. It can be seen that there was a merger of Wipro Infrastructure Engineering Ltd., Wipro Healthcare IT Ltd., Quantech Global Services Ltd., with this company dur....
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....ns. The assessee is aggrieved by this exclusion. 27.2. Having heard both the sides and perused the relevant material on record, we find from the Annual accounts of this company, whose copy has been placed on record, that it is into sale of products. This fact is borne out from the total of sales which include 'Sale of products.' In view of the reasons given above while allowing the exclusion on the ground of functional dissimilarity because of such companies also engaged in software products, we hold that the TPO was right in not treating this company as comparable. (iii) Nihar Info Global Ltd. 28.1. The TPO excluded this company on the ground that it was also a product company. 28.2. We have gone through the Annual report of this company for the year under consideration. Page 2351 of the paper book clearly records under Schedule-M[3(i)] that: 'income from software products is recognized on the basis of the sale to the clients.' Since this company is also engaged in the sale of products, we hold that this company was rightly not included in the list of comparables. The assessee fails on this count. (iv) VMF Softtech Ltd. 29.1. The TPO did not consider this company....
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....m of Rs. 172.51 lac in its Profit & Loss Account as licence expenses. On being required to furnish the details of such expenses, the assessee submitted that as per the agreement with its AE, the ITP charges were to be paid by the subsidiary to the parent company @ 45% of the total sale value of software and support and maintenance charges. Treating this amount paid by the assessee to its AE as an intangible asset, the Assessing Officer allowed depreciation @ 25% and made addition for the remaining sum of Rs. 112.50 lac, against which the assessee has come up in appeal before us. 34. After considering the rival submissions and perusing the relevant material on record, it is noticed that Aircom, UK, offers solution for network engineering requirements with its software, namely, 'ENTERPRISE suite', which is a solution for all aspects of network engineering. Apart from directly licensing ENTERPRISE suite by Aircom, UK, the assessee also sells the software in the domestic market Since the intellectual property rights relating to ENTERPRISE suite vest in Aircom, UK, the assessee entered into contract with Aircom, UK to sell this Product directly in the domestic market. As a quid pro q....