2019 (11) TMI 91

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....the appellant is a joint venture between Sumitomo Wiring Systems Limited, Japan and the Samvardhana Motherson Group, India. The appellant provides customised software. The areas of expertise of the appellant span across business process automation, cross functional and cross enterprise integration, optimization of processes. The appellant caters both to the domestic and export markets for which different segments are maintained. The export sales are mainly from software development services. 4. During the year under consideration, the appellant undertook the following international transactions with its Associated Enterprises [AEs] which were duly reported in the Accountant's report in form 3CEB filed alongwith return of income: i) Provision for software development services; ii) Services received; iii) Reimbursement of expenses, and iv) Payment of interest on loan. 5. The quarrel in the present appeal is only in respect of provision of software development services. The bench marking approach of the appellant is TNMM, used as the most appropriate method, PLI being OP/ OC [Total Cost] for which the assessee used 16 comparables whose mean ma....

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.... challenged the two comparables for which information was received from the companies u/s 133(6) of the Act and no opportunity was given to the assessee to put forth its arguments against the exclusion of these two comparables. 9. Before proceeding any further, let us first understand the following relevant filters adopted by the TPO: i) Single year data i.e. F.Y. 2006-07 ii) Though the assessee has taken companies with ratio of other operating income to sales greater than 50%, the TPO selected 75% limit. Accordingly, all the companies whose income from software development services constituted at least 75% of the total operating income were selected. iii) Though the assessee has taken companies with ratio of R & D expenses to sales greater than 3%, the TPO was of the opinion that there are no studies to show that the R & D activity changes the functionality of a software developer. iv) Companies with operating sales less than Rs. 1 crore were eliminated. v) Related party transactions more than 25% of the operating revenues were excluded. 10. Since the appellant is mainly an export oriented software development provider, the TPO ap....

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.... 20% of voting power in that company. Keeping these provisions in mind, we are of the view that the filter of 25% applied by the TPO is apt. 15. Another argument placed by the ld. counsel for the assessee is that this company owns software products and is also engaged in the sale of software products. But, as mentioned elsewhere, segmental reporting is in detail in the Annual Report of this company. We do not find any reason for exclusion of this company. This company will remain in the final set of comparables. II. AVANI CIMCON TECHNOLOGIES LIMITED 16. The Annual Report of this company is placed at pages 80 to 96 of the paper book. The total income is shown at Rs. 3,64,27,306/- and which includes earning software export in foreign currency amounting to Rs. 3,54,77,523/- which is 97.39% of the total income and hence passes the filter of 75% adopted by the TPO. The ld. counsel for the assessee strongly contended that this company is involved in the provision of IT and related services and owns software products and segmental details are not available. 17. In so far as the segmental details are concerned, we have already pointed out that 97% of the Revenue is coming from ....

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....,22,252/- which includes export turnover and domestic turnover. But no segmental information is available. The TPO has also mentioned that from the Annual Report available in the public domain, functionality is not clear and also the RPT information was not available. 21. Though the TPO refers to the reply received by him pursuant to the notice issued u/s 133(6) of the Act, but no details have been furnished by the TPO in respect of the reply demonstrating that this company passes all the filters applied by him. As the Annual report exhibited in the paper book does not contain full details, therefore, for want of adequate details, this company cannot be taken as a comparable and the same is directed to be excluded from the final set of comparables. V. FLEXTRONICS SOFTWARE SYSTEM [SEG] 22. The Annual Report of this company is placed at pages 147 to 209 of the paper book. The total sale of this company is shown at Rs. 7,28,60,38,887/- out of which software services sales is Rs. 6,45,66,52,651/- which comes to 88.60%. But the alarming factor is that the previous year period has been taken ended on 30.06.2006 whereas the figure compared is when the period ended on 31.03.2007 w....

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....9,05,322/- which includes income from software development export sales of Rs. 2,00,09,937/-. Though the ld. counsel for the assessee has contended that this company is functionally dissimilar and segmental information is not available, but from the schedule forming part of the balance sheet, income from software development export sales is separately mentioned alongwith other segments, namely, translation and interpretation - export, indigenous and training receipts. The ld. counsel for the assessee further contended that this company fails the filter of accepting companies with software service revenue in excess of 75%. 28. The ld. counsel for the assessee further contended that this company has revenue by way of sale of products and training but the break up is not available. As per the information gathered by the TPO u/s 133(6) of the Act, this company has categorically stated that the core business is that of pure software development service provider and revenue from domestic training activities is very small. The revenue from software development services constitutes more than 88% of the total operating revenue. All these facts were confronted to the assessee. As no plaus....

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....of the Revenue which means that more than 99% of the Revenue is from software services. 33. The ld. counsel for the assessee vehemently stated that this company is functionally dissimilar as it is engaged in outsourced software product development services as investment in Intellectual property led sales. The ld. counsel for the assessee further stated that this company has undertaken significant restructuring and has very high turnover, but failed in convincing us the impact of these things on the over all margin of the company. Therefore, we are of the considered view that this company passes all the filters and has been rightly taken in the final set of comparables. No interference is called for. XIII. R SYSTEMS INTERNATIONAL LIMITED 34. The Annual Report of this company is placed at pages 896 to 1058 of the paper book. The Financial Accounts of this company shows that its accounting year is calendar year whereas that of the assessee is financial year. We, accordingly, restore this comparable company to the file of the TPO. The TPO is directed to use financial year data to demonstrate that this is a good comparable. XIV. SASKEN COMMUNICATION TECHNOLOGIES LTD 35. T....