AI Drafter 
TaxTMI 
TaxTMI 
2015 (1) TMI 1360
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....ngth Price (ALP) of the international transaction undertaken by the assessee during the relevant previous year and if these grievances are addressed, the other grounds on the TP could be left for adjudication at a later stage, when found required. Accordingly, with regard to the issues raised by the assessee on its international transactions, we are adjudicating those relating to the selection of comparables by the Transfer Pricing Officer (TPO). 4. Facts apropos are that the assessee a software development company had filed its return for the impugned assessment year declaring income of Rs. 11,95,59,950/- after claiming deduction of Rs. 6,36,87,980/- u/s 10A of the Income tax Act, 1961 ( in short 'The Act') Act. Since assessee had international transaction with its associated enterprises it had filed along with its return of income an audit report, as stipulated u/s 92E of the Act. AO made a reference to the TPO for determining the ALP of the international transactions undertaken by the assessee. In the TP report given by the TPO on 12-10-2010 he has mentioned that the assessee is a part of one i2 group a leading provider of supply chain management software. The profile of the ....
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....ed items (Exchange loss and interest) 3015202 18336 1767400 3209938 Actual operating cost (OC) 1028111849 6685033 15677975 10150474857 Operating profit (OP) 129328266 353504 52036426 181718196 OP as % of OC 12.54% 5.27% 328.21% 17.30% It is to be noted that the TP adjustment finally recommended by the TPO was confined to software development and services segment only. In so far as marketing services support was concerned, the turnover being less than Rs. 1.00 Crore, no adverse inference was drawn by the TPO. 5. In its TP study, assessee had selected 17 comparables from capital line and Prowess data base, considering itself to be a software development company. In addition to this, during the course of proceedings before the TPO, assessee has suggested six additional comparables. Thus, altogether the comparable companies selected by the assessee for justifying its profit margin were 23. Assessee had adopted the TNM Method for working out the margin on cost and this was not disputed by the TPO. However, out of 23 comparables companies considered by the assessee, TPO rejected 4 applying diminishing revenue filter....
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....2,81,11,849/- Arms Length Margin 28.55% of the operating cost Arms Length Price(ALP)@128,55% of operating cost Rs.132,16,37,782/ Price charged in the international transactions Rs.115,74,40,115/- Shortfall being adjustment u/s 92CA Rs. 16,41,97,667/- 6. When a draft assessment order in line with the recommendation of the TPO was received, assessee moved an application before the Draft Resolution Panel(DRP). However, the DRP did not disturb the comparables considered by the TPO. In the result, the final assessment was completed making a TP addition of Rs. 16,41,97,667/-. 7. Now before us, learned AR assailing the selection of comparables done by the learned TPO, submitted that in the case of NXP Semiconductors India Pvt.Ltd.,Vs ACIT adjudicated by this Tribunal on 14- 11-2014 (in IT(TP)A No.1174(B)/2011) similar set of 26 comparables were considered by the TPO. According to him, but for 12 comparables all others were directed to be excluded by the Tribunal for functional dissimilarities. Learned AR placed on record a copy of the said order of the Tribunal. Further, as per the learned AR the said M/s NXP Semiconductors India Pvt .Ltd., (supra) ....
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....e development service to its associated enterprises abroad. The turnover of M/s NXP Semiconductors India Pvt.Ltd. favourably compares with that of the assessee. Since functional profile and the turnover of the assessee and that of M/s NXP Semiconductors India Pvt.Ltd. are similar and also since the order of the Tribunal in the case of M/s NXP Semiconductors India Pvt.Ltd. relied only the earned AR was also for the very same assessment year, we are of the opinion that such order of the Tribunal can be considered as a good precedent for adjudicating on the selection of comparables in the case of assessee also. 11. M/s Accel Transmatic Ltd, M/s Avani Cimcon Tech. Ltd., M/s Celestial Labs Ltd.and M/s KALS Information Systems Ltd, were 4 of the companies among the comparables considered in the case of M/s NXP Semiconductors India Pvt .Ltd. (Supra). Co-ordinate Bench at para-18 to 19 of its order dated 14-11-2014 held as under; 18. As far as comparable companies listed at Sl.No.1,2,3 and 12 of the final list of comparable companies chosen by the TPO viz., M/S.Accel Transmatic Limited (seg.), Avani Cincom Technologies Ltd., Celestial labs Limited and KALS Infosystems Ltd., are conce....
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....s 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. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 ....
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.... 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 lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has sign....
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....nd 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 company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in s....
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....: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basi....
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....f comparables for the purpose of determining TNMM margin." 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 20. Respectfully following the decision of the Tribunal in similar set of facts, these companies are directed to be excluded from the list of comparables....
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....s 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 information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the coordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefullyconsidered the material on record. It is seen from the ....
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....he 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 development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decis....
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....in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 18. Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, t....
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....been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen 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....
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....tion 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. 2006-07 revea....
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.... 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 assessee pointed out that as in the c....
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.... under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs. 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (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 Repr....
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....erial 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 development 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 ....
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.... of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to 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. Respecfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from....
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....l 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. Respecfully 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. Thus, we direct exclusion of these two companies also from the list of comparables. 16. As far as M/s Megasoft Ltd., is concerned this Tribunal had in the case of M/s NXP Semiconductors India Pvt.Ltd.(Supra) held it as a good comparable, but certain modification to the operating results of the said company were required. This is mentioned at para-22 - 23 of its order, which is reproduced hereunder; 22. As far as comparable companies listed at Sl.No.16 of the final list of comparable companies chosen by the TPO viz., M/S.Megasoft Limited is concerned, this Tribunal in the case of First Adva....
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....usiness environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for....
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.... discussion is that the following companies will go out of the list of comparables. 1. Accel Transmatic Ltd(Seg.) 2. Avani Cimcon Tech.Ltd. 3. Celestial Labs Ltd 4. E-Zest Solutions Ltd. 5. Helios & Matheson Information Tech.Ltd. 6. Infosys Technologies Ltd 7. Ishir Infotech Ltd 8. KALS Information Systems Ltd.(Seg.) 9. Lucid Software Ltd. 10. Persistent Systems Ltd 11. Quintegra Solutions Ltd 12. Tata Elxsi Ltd 13. Thirdware Solutions Ltd. 14. Wipro Ltd Vis-à-vis M/s Megasoft Ltd., the TPO will have re-work its results while retaining it as a comparables based on a directions given by the Tribunal in the case of M/s NXP Semiconductors India Pvt.Ltd. reproduced at para 16 above. TPO has to re-work the ALP of the international transactions with regard to software development segment, based on the comparables after excluding the above mentioned companies and proceed in accordance with law. For working out the working capital adjustment, the AO/TPO shall consider only the finally retained comparables. Ordered accordingly. 18. In the result, ground no.1 to 7 of the assessee are treated as partly allowed. 19. Now we take up the C....