TaxTMI 
TaxTMI 
2023 (9) TMI 379
X X X X Extracts X X X X
X X X X Extracts X X X X
....come Tax Act, 1961 (for short "the Act"), both Assessee and Revenue filed these appeals. Assessee also filed cross objections 2. Briefly stated relevant facts are that the assessee is a company that develops computer software to provide Software Development Services (SWD) to Alliance Global Services, LLC, USA. Such services include consultancy services in the areas of system specifications, system design, systems development, programming, implementation, maintenance and such other areas as may be agreed upon between the assessee and Associated Enterprise (AE) from time to time. AE will purchase all of the computer software development services to be produced by the assessee as per the specifications and design provided by the AE. The parties undertake to exchange technical information necessary to achieve the objectives under this agreement. Assessee shall take such precautions as AE deem appropriate to protect all confidential and proprietary information furnished by the AE in connection with this agreement. All technical information and intellectual property provided to assessee for the purpose of development of computer software required by the AE, and all derivatives thereof, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ained in the final set of comparables. 8. Aggrieved by the exclusion of eight comparables by the learned DRP, Revenue preferred ITA No. 317/Hyd/2016 whereas challenging the inclusion of two comparables, assessee filed cross objections. Assessee also filed ITA No. 189/Hyd/2016, challenging the TP adjustment on account of the interest on receivables. 9. Coming to the exclusion of comparables, according to the learned DRP, eight comparables are not functionally similar to the assessee. According to the Revenue, they are functionally similar. Learned DR submitted that in the case of Zeta Interactive Systems (India) (P.) Ltd., vs. ITO [2022] 142 taxmann.com 202 (Hyderabad - Trib.), all these entities are considered, found functionally similar and, therefore, directed to the included. We now proceed to deal with these comparables in detail. 10. In respect of Acropetal Technologies Ltd (Seg.), assessee contended before the learned TPO that in the year in question, there was an acquisition and, therefore, on account of extraordinary events, effecting the profitability of the company, the same may not be considered. Learned Assessing Officer observed that there was no acquisition during ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cs Ltd., earns its revenues from software development, consultancy, licensing and sublicensing, annual maintenance charges for software support, web development and hosting but not segmental information was available and, therefore, this company renders itself not a good comparable to the assessee. 13. As far as Igate Global Solutions Ltd., is concerned, assessee pleaded before the learned TPO that Igate Global Solutions Ltd., had extraordinary/exceptional events like acquisition of Patny computers creating multiplayer effects with the synergies of Igate Global Solutions Ltd., and Patny, and in view of the decision of the Tribunal in the cases of Capital IQ Information Systems IP Ltd., Excellent Data Research Pvt. Ltd., and Hyundai Motors India Engineering Pvt. Ltd., this company cannot be included in the list of comparables. According to the learned TPO, primarily this company is providing SWD services but though the terms used are generic in nature, indicating diversified activities, but the annual report makes it clear that the main business of the company is SWD and IT services and, therefore, it cannot be said that this company is not a good comparable. But, according to the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee before the learned TPO was that this company is a leading simulation and training solutions company, providing end-to-to simulation solutions customised to the end users, apart from which it also develops products, but no segmental information relating to the revenues is available. Learned TPO on a perusal of the profit and loss account recorded that the details of income from software, domestic and export, are available. Apart from this, he also recorded that the products are made for the end users and not for the general sale. Learned DRP excluded this company by finding that the functional profile of this company is not comparable to the software development functions, abnormal variation in the profit margins in various years indicate the existence of extraordinary circumstances and, therefore, this cannot be continued in the list of comparables. 17. Lastly coming to the case of Zylog Ltd., the assessee pleaded that this company had extraordinary events like acquisition of another company in Canada, thereby acquiring new customer database, new geographical area of business, new services and product offerings. Apart from this, it has a huge turnover as compared to the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tly so, are performing the functions not similar to that of the assessee and most of them of into diversified activities as found out by various adjudicatory authorities and, therefore, in the light of the observations of the Co-ordinate Benches of the Tribunal in such cases, the comparability could be decided. 21. We have gone through the record in the light of the submissions made on either side. Coming to Acropetal Technologies Ltd (Seg.), according to the annual report of this company, its key services include Engineering design services, Healthcare, Enterprise solutions and IT Infrastructure solutions. It offers technological expertise and commitment to deliver cost-effective software products. It indicates that this company is not a pure software development company, but is also engaged in product development. Even in the segment of Information technology service, no bifurcation figures are available between software development service and software product activity. As per segmental reporting, the income from Information Technology Services is Rs. 81.40 crores out of the total income of Rs. 141.65 crores, indicating that the income from software development services is only....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omparable. 23. Next comparable that falls for our consideration is ICRA Techno Analytics Ltd. As per the annual report incorporated in the paper book, ICRA Techno Analytics Ltd., is engaged in the software development & consultancy, engineering services, web development & hosting and subsequently diversified in the domain of business analytics and business process outsourcing (BPO). These functions are in variation with the functions of the assessee as a SWD services provider. Apart from this, revenues of this company from services consists of revenue earned from services performed for software development & consultancy, licensing & sublicensing fee, annual maintenance charges for software support, web development & hosting. Revenue from sales is recognized as and when delivery of the branded softwares is made and is booked net of trade discount. No separate segment information available for different line of services as well as sale of traded goods. At Page No. 31 of the annual paper book, only one segment is mentioned as primary segment and no details of revenue in respect of the other activities is to be found. Further, this company had income from sale of traded goods. It was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar as Infosys Ltd. and L&T Infotech Ltd., are concerned, undisputedly these companies own products and leverages, incurs huge amount of research and development expenses, revenue are primarily derived from software development and related services and from the licensing of software products. These companies provide end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. These companies provide solution that encompass technical consulting, design, development, re-engineering, maintenance, system integration, package evaluation and implementation, testing and infrastructure services. In addition, Company offers software products for sectors of industry. In assessee's own case for assessment year 2009-10 in ITA No. 58/Hyd/2014 Infosys was found functionally different from a company providing simple software development services as it owns significant intangibles and has huge revenues from software products. Likewise, in assessee's own case for assessment year 2013-14 in ITA No. 2122/Hyd/2017 it was found that on the grounds of huge intangibles and no availability of segmental information between software ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lved in providing on-site services to its clients and, therefore, following different business model. The company earns income from software development services as well as from sale of products and no segmental information available. The company earns revenues from software development services, consultancy services, projects and e-governance services, the company has also hired technical consultants on contract for software development activities which suggests a different business model. It also owns significant intangibles and carries on extensive research and development activities. Weare not impressed with this argument on behalf of the assessee. It could be seen from the consolidated profit and loss account of the company, out of the total revenue of Rs. 1,921 crores, the income from SWD services and products is upto Rs. 1,884 crores and other income constitutes only Rs. 5 crores. There is no reference to any closing stock, inventories or work in progress so as to infer that other than software development, this company is involved into some manufacturing products. Software product is also the result of software development only. Merely because the use of generic terms, a so....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of the assessee is that the Ld. TPO should not have made any adjustment on account of the notional interest on delay in collection of dues from the associated enterprise, and if for any reason such an adjustment has to be made it has to be made only in respect of the debt outstanding for 180 day, that too at the rate of LIBOR +1.5%; whereas the case of Revenue is that the learned DRP should not have reduced the rate of interest on receivables fro 12% to 5%. On this aspect Ld. DRP referred to the view of the Bangalore Bench of the Tribunal in the case of M/s Logix Microsystems Ltd in ITA No. 524/Bang/2009 and also the view taken by the Delhi Bench of the Tribunal in the case of Kusum healthcare Pvt. Ltd in ITA No. 6814 /Del/ 2014, and directed the learned Assessing Officer/Ld. TPO to compute the ALP of the interest on the outstanding receivables at 5%, instead of 12% as determined by the Ld. TPO. 33. Assessee is contending that no transfer pricing adjustment need be made in respect of the notional interest on delay in collection of dues from the associated enterprise, because it is not an international transaction and secondly contending that if at all such an adjustment has to b....