TaxTMI 
TaxTMI 
2016 (3) TMI 1256
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....r RPTs while selecting the comparables. 3. Facts apropos are that assessee is a wholly owned subsidiary of Novell Inc., USA (Novell US). Novel US, helps customers realise the value of their information and deliver it securely and economically to their stake holders across any platform. Assessee provided software development and support services to Novel, US Inc. Financial results of the assessee for the relevant previous year read as under : Operating income 495420000 Gross Operating Cast as per P&L A/C 448990000 Less: Adjustments Exchange Loss 1361000 Net Operating cost 447629000 447629000 Op. front 47791000 Operating Profit to Op. Cost %age 10.68% 4. Its international transactions with the AEs as per the audit report in Form 3CEB were reported as under (a) Software Development Services Rs. 49,54,20,498/- (c) Reimbursement of Expenses paid Rs. 38,18,579/- 5. Assessee did its TP study based on TNMM for the software development services segment. Vis-a-vis the segment concerning reimbursement of expenditure to the AE, TPO had not rec....
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.... 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% 2.68/2.39% 12.77 11.40% 22 Sasken Communication Technologies Ltd. (Seg.) 343.57 22.16% 0 3.94 1.15% 23 SIP Technologies & Exports Ltd 3.80 13.90% 0 0 0.00% 24 Tata Elssi Ltd (Seg.) 262.58 26.51% 0 3.34 1.27% 25 Thirdware Solutions Ltd 36.08 25.12% 0 3.60 9.90% 26 Wipro Ltd (Seg.) 9616.09 33.65% 0 58.26 0.61% 25.14% 7. Common comparables appearing in both the list of assessee as well as that of the TPO were as under : ....
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....idered by the TPO in the said case was also the very same. Further as per the Ld. DR, Meritor LVS India (P) Ltd, (supra) was also for the very same assessment year. Hence according to him, the said decision should be considered as a good precedent for excluding the above mentioned companies. As for Geometric Ltd (seg), Ld. AR submitted that RPT of the said company exceeded 15% and by virtue of coordinate bench decision in the case of 24/7 customer.com Pvt Ltd v. DCIT [(2013) 140 ITD 344] had to be excluded. Vis a vis Quintegra Solutions Ltd, Ld. AR submitted that comparability of the said company in software development services was an issue which had come up before this Tribunal in the case of NXP Semiconductors India P. Ltd, [IT(TP)A.1174/Bang/2011, dt.14.11.2014]. As per the Ld. AR, it was held in the said decision that Quintegra Solutions Ltd, could not be considered as a proper comparable in the said segment. 11. Continuing his arguments, Ld. AR submitted that Megasoft Ltd, though it could be considered as a good comparable, segmentation of its results was necessary in line with the decision of this Tribunal in the case of Triology E- Business Software India P Ltd, v. DCIT ....
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....td (supra) can be taken as a good precedent. Tribunal in the said decision followed a coordinate bench decision in the case of Hewlett- Packard (India) Globalsoft P. Ltd, v. DCIT [IT(TP)A1031/Bang/2011, dt.23/09/2015], which again relied on a coordinate bench decision in the case of NXP Semi conductors India P. Ltd v. ACIT [IT(TP)A.1174/Bang/2011, dt.14.11.2014]. 15. Vis-a-vis comparability of Accel Transmatics Ltd (seg), this Tribunal has held as under at para 8 of its order : 8) 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. ....
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.... 9) Avani Cimcon Technologies Ltd. "39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's 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 t....
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.... the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession 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 comparabilit....
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....ns so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has 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 develo....
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....the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable." 18. As for E-Zest Solutions Ltd, this Tribunal had held as under at para 2 of its order (supra) : 2) "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....
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....mparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. /TPO is accordingly directed." 19. In respect of Flextronics Software Systems Ltd (seg), findings of the Tribunal as appearing at para 10 of the above mentioned order is reproduced hereunder: 10) Flextronics Software Systems Ltd (seg) : "26. Now taking up the question of exclusion of Flextronics Software Systems Ltd (seg), it is true that the decision of Motorola Solutions (India) P. Ltd (supra) also was for the very same year and also on software development services sector. This Tribunal held as under : "97.2 For a company to be included in the list of comparables, it is necessary that credible information is available about the company. Unless this basic requirement is fulfilled, the company cannot be taken as a comparable. It is true that ld. TPO is entitled to obtain information us/ 133(6), the object of which is primarily only to supplement the information already available on....
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....usion of items at (9) and (11) namely Helios & Matheson 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 ITservices 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 o....
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....diately preceding assessment year and in the present 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 ha....
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.... (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (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 signifi....
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....d in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied the 25% 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." 23. In respect of Kals Information Systems Ltd, findings of the Tribunal as appearing in para 4 of the order (supra) is reproduced hereunder : 4) 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 p....
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....he plea of the Assessee that this company is not comparable." 24. Vis-a-vis Persistent Systems Ltd, findings of this Tribunal as it appear at para 12 of the order mentioned supra is reproduced hereunder : 12) Persistent Systems Ltd. "17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee'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 fun....
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.... 25. As for Sasken Communication Technologies Ltd (seg), findings of this Tribunal as appearing in para 13 of its order mentioned supra is given hereunder : 13) Sasken Communication Technologies Ltd.: "109. Ld TPO noticed that the company was rejected in the TP document on the ground that the company fails its filter of business review and R&D to sales was more than 3%. However, no reasons were given for the business review. 109.1 Ld. TPO pointed out that R&D to sales being more than 3% is not acceptable for which detailed discussion has already been made earlier. He further noticed that the company has software services segment and segmental results are available for software services. He further pointed out that on the basis of information obtained u/s 133(6), the company qualifies onsite revenue filter (onsite revenues were to the extent 27.27% of its export revenues). After considering the assessee's reply, ld. TPO included this company in the list of comparables. Ld. counsel pointed out that this company has incurred significant expenditure on research and development activity the same being 6.07% of sales. He further submitted that the company ha....
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.... on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 14.2 Before us, it was reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and (c) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 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 s....
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....earned 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 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 dev....
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....pment services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (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 such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the coordinate bench of the Tribunal i.e. 24/7 Customer.Com ....
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....tems Ltd, Sasken Communication Technologies Ltd (seg), Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg) from the list of comparables considered by him. 31. As for Geometric Ltd (seg), argument of the Ld.AR is that its RPT exceeded 15% by virtue of the decision of coordinate bench in the case of 24/7 Customer.com P. Ltd, (supra) it has to be excluded. TPO himself has in the comparison chart prepared by him given RPT of Geometric Ltd (seg), at 19.98%. Range of RPT generally accepted by coordinate benches of the Tribunal is 5 % to 25% and average thereof comes to 15%. Question of having a higher RPT level or lower RPT level would depend on the number of comparables available after exclusions. In the case before us there are 26 comparables and even after exclusions there will definitely be at least nine comparables. Hence, we are of the opinion that RPT at 15% can be rightly applied. Nevertheless since assessee had not raised this ground before any of the lower authorities, we remit the question of exclusion of Geometric Ltd, back to the file of the AO / TPO for consideration afresh. 32. Vis-a-vis Megasoft Ltd, we find that this Tribunal in the case of Meri....
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....combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its software service segment. The product segment has employee cost of 27.65% whereas the software service segment has employee cost of 50%. Similarly, the profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both the segments are substantially different and therefore comparison at entity level is without basis and would vitiate the comparability (submissions on page 381 to 383 of the PB-I). It was further submitted that Megasoft Limited has provided segmental break-up between the software services segment and software product segment (page 68 of PB-II), which was also adopted by the TPO in his show cause notice (Page 84 of PB-I). The segmental results i.e., results pertaining to software services segment of this company was: Segmental Operating Revenues Rs.63,71,32,544 Segmental Operating Expenses Rs.51,75,13,211 Operating Profit Rs.11,96,19,333 OP/TC (PLI) 23.11% 26. It was reiterated that in the given circumstances only PLI of software ....