TaxTMI 
TaxTMI 
TaxTMI 
2021 (1) TMI 908
X X X X Extracts X X X X
X X X X Extracts X X X X
.... reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. I. PROVISION OF SOFTWARE DEVELOPMENT SERVICES 3. The first issue raised in this appeal is against the transfer pricing addition of Rs. 15,11,98,577/- made by the AO in the international transaction of "Software Development services". The facts anent to this are that the assessee declared value of the international transaction of 'Provision of Software Development services' at Rs. 2,49,14,47,288/-. The assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method for showing the international transaction at ALP. The assessee initially selected 9 comparables on the basis of three years' data. On being pointed out by the TPO for considering data for the current year alone, the assessee excluded 3 companies from the existing list and also included fresh 3 companies thereby making a list of 9 comparables on the basis of single year data. The TPO retained 2 companies from the assessee's list and included 7 fresh companies. He, accordingly, determined the ALP of the international transaction of providing "Software D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....modifications of existing products on the basis of customized requirements. At times, the assessee directly liaises with the customers to understand their exact requirements. 5. The assessee entered into an Agreement with BMC, Houston; BMC, Singapore; and BMC, Netherlands effective from 01-04-2009 for rendering all the services, including the software development services. A copy of the Agreement has been placed at page 1812 onwards of the paper book. Nature of services to be provided by the assessee has been set out in clause 2.1 of the Agreement, which states that the assessee shall render some of the services to Users (i.e. BMC overseas entities) as listed in Appendix. Appendix-A to the Agreement sets out the services to be rendered by the assessee to BMC overseas entities. Insofar as the Software Development services are concerned, the relevant clauses in Appendix-A are (a) and (f). Clause (a) refers to "Production of computer software by way of architecturing, engineering, design, development, testing and support of software". Clause (f) talks of V Website services'. Compensation has been fixed at certain mark up. On going through the relevant clauses of the Agreement and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,961/-. Notes to the Financial statements indicate that: "The company is engaged in development of Software and Software Products since its inception'. The fact that the company is into Software products is further evidenced from the figure of "Inventories" in its balance sheet. Further, the list of operating expenses includes an item of "Software consumption from inventory" at Rs. 11.00 lakh. The 'Segmental revenue' of this company has bifurcated total operational revenue into two parts, namely, 'Application Software' - Rs. 2,16,92,935/- and 'Training' - Rs. 13,52,209/-, which matches with the total revenue from operations. Thus it is manifest that insofar as the revenue from sale of products and development of software is concerned, the same has been combined under the segment "Application Software". The above discussion deciphers that this company is engaged in software products as well as Software Development services, income from both of which streams has been clubbed under the segment of "Application Software". Since the assessee in the instant case is involved only in rendering Software Development services to its AEs and is not into any software ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of comparables which was objected to by the assessee for functional differences. The TPO did not accept the assessee's contention. No relief was allowed by the DRP as well. 14. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, whose copy has been placed from page 1752 onwards of the paper book, that it has Sales revenue of Rs. 67.56 crore. Break-up of such revenue is available at Schedule-12, giving figures of Exports from SEZ and STPI units; Revenue from subscription; Sale of license; and Software services. This indicates that this company, apart from rendering software services, is also engaged in software products. Segmental information has been given on the basis of geographical segments. Thus, it becomes crystal clear that no information regarding revenue from software services distinct from other activities is available on record. As the assessee is engaged only in rendering software development services, this company on the basis of figures available on record, cannot be considered as comparable. We, therefore, direct to exclude it from the list of comparables. (d) Persistent Systems ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss than 75%. The assessee submitted Annual report of the company for the next year, which also contained figures for the year under consideration. The DRP echoed the order of the AO excluding Maveric Systems Ltd. from the list of comparables by noticing that not only the quantitative information but the qualitative information for the year was also required, which could depict business activities of the company for deciding the functional profile comparability, Related party transactions, happening of extraordinary events, reasons for high loss or profits and segmental working etc. In the absence of the availability of the Annual report of this company for the year under consideration, the DRP did not consider it appropriate to include the same in the list of comparables. 20. We have heard the rival submissions and gone through the relevant material on record. The assessee has placed on record a copy of the Annual report of the company for the year under consideration by claiming that the same is now available in the public domain. As regards the TPO's contention that the foreign exchange earnings of this company were less than 75%, we find from the Schedule 9 that it earned r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xclusion if it is consistently posting losses due to exceptional reasons. The Hon'ble jurisdictional High Court in CIT Vs. Goldman Sachs (India) Securities (P) Ltd. (2016) 290 CTR 236 (Bom) did not treat a company as a persistent loss making company qualifying for exclusion, which did not incur loss in the year of review and immediately two earlier years in a row. 25. The Ld. AR stated that Quintegra Solutions Ltd. incurred losses only in this year and in the immediately preceding year. A year prior to that, it was not a loss making company. This was fortified by the respective Annual reports of this company. As this company did not persistently incur losses, we hold that it cannot be excluded on this criterion. This company is, therefore, directed to be included in the list of comparables. 26. The Revenue, in its appeal, is aggrieved by the exclusion of three companies from the list of comparables. 27. The TPO excluded RS Software India Ltd., Thinksoft Global Services Pvt. Ltd. and Silverline Technologies Ltd. by holding that they were engaged in rendering on-site services. The DRP did not find any merit in the view point of the TPO that rendering on-site services was any d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s no reference to any foreign branch, it becomes evident that this company is engaged in rendering on-site services and the major component of its revenue is from such on-site services only. That being the position, this company loses its comparability tag with the assessee company. We, therefore, reverse the view of the DRP and direct to exclude it from the list of comparables. 31. Somewhat similar is the position regarding Thinksoft Global Services Pvt. Ltd. We have examined the Annual report of this company which has been placed on record. The Ld. DR invited our attention towards page 1147 of the Paper book categorically indicating that this company earned revenue from on-site services. The Ld. AR accepted this position. We, therefore, direct to exclude this company also from the list of comparables and consequently reverse the view taken by the DRP on this issue. II. PROVISION OF I.T.E.S.: 32. The assessee declared an international transaction of 'Provision of IT enabled services' with transacted value of Rs. 10,21,67,498/-. It applied the Transactional Net Marginal Method (TNMM) for demonstrating that the international transaction was at Arm's Length Price (ALP)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmediately preceding assessment year, 2009-10. No relief was allowed by the DRP. 36. Having heard the rival submissions and gone through the relevant material on record, we find that the TPO included this company in the list of comparables by relying on the direction given by the DRP for the assessment year 2009-10. The assessee assailed the final assessment order passed for such assessment year before the Tribunal. Vide its order dated 22-08-2019, the Tribunal in ITA No. 189/PUN/2014 has directed to exclude this company from the list of comparables. The DR fairly conceded that the facts and circumstances of this company for the extant year are mutatis mutandis similar to those of the preceding year. Following the precedent, we direct to exclude this company from the list of comparables. (ii) Coral Hubs Ltd. (Vishal Technologies Ltd.): 37. The assessee disputed the comparability of this company before the TPO but without success. The DRP also did not approve the objections of the assessee. 38. The Annual report of this company for the relevant year has been perused, a copy of which has been paced at page 1550 onwards of the paper book. Its Profit and loss account is available a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as a whole should be included. 41. The first leg of the objection is not tenable. The break-up of ITES revenue has been given by the company under V Segmental reporting' at page 1674 of the paper book, which has two parts, namely, BPO operations - Rs. 141.10 lakh and ERP - Rs. 33.33 lakh. Not only that, profit has also been given separately therein for both, with the figure of profit from BPO operations at Rs. 52.99 lakh. The view point of the assessee that ITES segment is not comparable because of the inclusion of ERP revenue is, therefore, not sustainable because the figures of revenue and profit from the BPO segment is separately available and the nature of work admittedly matches with that of the assessee. 42. The second leg of the Ld. AR's argument that if at all this company is to be included, then its full ITES segment should be taken. Again, we do not find any merit in this contention as well. The Directors' report unequivocally divulges that the nature of work under the ERP division is all in all different. It has been mentioned that: 'Your ERP division has also successfully completed the project implementation for various clients. For the current financi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om the Agreement referred to hereinabove. It has been stated as "Sales Support services in relation to User's products sold in India and the Asia Pacific region either directly or through channel partners". Thus, primarily the assessee rendered Sales Support services to its AE. 48. Now we turn to examine the comparability of ICRA Online Ltd. Annual report of this company has been placed at page 1732 onwards of the paper book. The TPO has included Information Services segment of this company for the purpose of comparability. Nature of operations under this segment have been discussed at page 1735 by stating that: "The Information Services LOB reported a robust 42% growth in 2009-10 over the previous fiscal, driven by the introduction of an upgraded version of its flagship product MFI Explorer and the launch of a new product MFI Impact, besides by the sharper focus that was brought into the domains of data, content and research". 49. At this stage, it is pertinent to note that the international transaction under consideration is provision of Sales Support services. As against that, the selected segment of the company is Information Services segment, which is deriving revenue fr....