TaxTMI 
TaxTMI 
2020 (3) TMI 946
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the facts and circumstances of the present case. 2. Reopening of Assessment: 2.1 The Honourable Dispute Resolution Panel ("DRP") erred in upholding the reassessment proceedings initiated under section 147 of the Act without appreciating that no "fresh tangible material" was available with the AO for forming a belief that the Appellant not made full and true disclosure of material facts leading to income escaping assessment. 2.2 The DRP erred in upholding the notice issued by the AO under section 148 of the Act to initiate the reassessment proceedings without appreciating that the said notice was issued by the AO beyond four years from the end of the Assessment Year ("AY") even when there was no failure on the part of the Appellant to "fully and truly" disclose all material facts relevant for assessment. 2.3 The DRP erred in law and on facts in holding that information available in the course of initial reassessment proceedings which were rendered void can be used to initiate subsequent reassessment proceedings. 3. Transfer Pricing Grounds: 3.1 The TPO has erred in completing the Transfer Pricing assessment without providing a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 3.8 The AO / TPO have further erred in discounting the PLR to its present value (9.30 percent as per the TPO's calculations) without appreciating that the average payables and receivables were taken by the TPO himself for the calculations. 4. Disallowance of depreciation under section 40(a)(ia) of the Act 4.1 The DRP and AO have erred in law and on facts in disallowing Rs. 26,24,742 on account of depreciation claimed on purchase of software products under section 40(a)(ia) of the Act without appreciating that the Appellant on its own had disallowed the software expenditure while arriving at the taxable income since the same was capital in nature.. 4.2 Without prejudice to the above ground, the DRP and AO have erred in law and on facts in disallowing the depreciation claimed on purchase of software products under section 40(a)(ia) of the Act without appreciating that disallowance under section 40(a)(ia) can be made only on revenue expenditure and cannot be extended to depreciation on software capitalised. 4.3 Without prejudice to the above grounds, the DRP and the AO have erred in law and on facts in disallowing excess depreciation of Rs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ordingly reference to transfer pricing officer was made for determining. 2.1. On receipt of reference, Transfer Pricing officer called upon assessee to file economic details of international transaction entered into by assessee with its associated enterprises in Form 3 CEB. Ld.TPO observed that, assessee is a subsidiary of Tektronix Inc USA and provider services to Tektronix Inc USA and Tektronix International Sales GmbH Switzerland. It was observed that, assessee undertook to provide sales support services, software development services as a contract software development services provider. Ld. TPO observed that, as per agreement with the associated enterprises, Network Appliances Inc., USA, assessee is compensated on cost +10% basis in respect of software development services. 2.2. Ld.TPO observed that, following were international transaction entered into by assessee: Particulars of international transactions Amount (in rupees) Receipts for software development services 22,88,46,170/- Recoveries (received) 54,39,231/- Reimbursement of expenses (paid) 46,71,173/- 2.3 Ld.TPO observed that, assessee used TNMM as most appropriate method for software d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee. 2.7. Aggrieved by final assessment order passed, assessee is in appeal before us now. 3. Ld.AR submitted that Ground No.1 are general in nature and therefore do not require any adjudication. 4. He submitted that Ground No.2 is challenging the reopening which is not pressed at the instructions of assessee. 5. Accordingly this ground stands dismissed as not pressed. Ground No.3 is in respect of trans-apprising addition. At the outset, Ld.AR submitted that, in revised grounds of appeal, Assessee seeks exclusion/inclusion of following comparables: * Avani CincomTechnologies * Celestial Labs Ltd., * e-Zest Solutions Ltd * Helios Matheson Information Technology Ltd., * Infosys Technologies Ltd., * Ishir Infotech Ltd * KALS Information Systems Ltd * Megasoft Ltd * Persistant Systems Ltd., * Tata Elxsi Ltd (SEG) * Thirdware Solutions Ltd. * Wipro Ltd (SEG) 5.1 Before we undertake comparability analysis of above comparables, it is sine qua non to understand functions performed, assets owned and risks assumed by assessee under both segments as observed by Ld....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re selected by Ld.TPO for very same assessment year in case of Meritor LVS India (P)Ltd., by this Tribunal reported in (2015) 64 Taxmann.com 136 and First Advantage Offshore Services Pvt Ltd vs DCIT in ITA (TP) No. 1086/B/2011. We also note that assessee before us and Meritor LVS, First Advantage Offshore Services Pvt. Ltd., renders software development services to associated enterprises under a contract services provider for very same assessment year. This Tribunal in these decisions have held following companies to be not comparable for year under consideration on identical functions which is risks mitigated being a contract service provider like assessee. We refer to observation made by this (Tribunal) in the case of (Meritor LVS, India Pvt. Ltd. (Supra)) in respect of following comparables. Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- * In 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 Hyderaba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore acce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....We have heard the rival submissions and perused and carefullyconsidered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I- Q InformationSystems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." 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 sala....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, 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 recor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat 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. 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:....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ning. 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 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agree....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gy 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 case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany 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. Tata Elxsi Ltd. 14.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables 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 as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....008-09. 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." 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, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned 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 T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 fit into their business 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 hold that Megasoft Ltd can be considered as a good comparable after segmentation as directed in the above order is done.' 5.2.1 There is nothing on record brought by authorities below that factual observations by this (Tribunal) in (Meritor LVS (Supra)) is incorrect. In all the above comparables it has been observed that it cannot be used as comparables to determine ALP of a risk mitigated, contract service provider. 5.2.2 Accordingly, following the above order we direct exclusion of Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, Infosys Technologies Ltd, KALS Information Systems Ltd(seg), Wipro Ltd (seg), Helios & Matheson Information Technology Ltd, Persistent Systems Ltd, Tata Elxsi Ltd (seg) and Thirdware Solutions Ltd. 5.2.3 In so far as Megasoft Solutions Ltd is concerned, we direct Ld.AO/TPO to rework segmental results and consider its comparability only with regard to software development services segment. 5.3 Ishir Infotech Ltd This comparable....