TaxTMI 
TaxTMI 
2021 (6) TMI 1164
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Hon'ble DRIP, erred in assessing the total income at Rs. 1,44,71,721 as against the returned income of Rs. 29,240; 2. The learned AO I Transfer Pricing Officer (TPO') and the Honble DRP have erred, in making an addition of Rs. 1,31,78,142 to the total income of the Appellant on pretext that price charged was lower than arm's length price determined for provision of software development services transaction rendered by Appellant to its AE(s); 3. The learned AO/TPO and the Hon'ble DRIP have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (the Rules'), and in conducting a fresh economic analysis for the determination of the arm's length price ('ALP') in connection with the impugned international transaction, and holding that the Appellant's international transaction is not at arm's length; 4. The learned AO/TPO and the Hon'ble DRIP have erred, in law and in facts, by determining the arm's length margin/price using only FY 2006-07 data though the same was not available to the Appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cts in considering them as comparable companies: a) Accel Transmatic Limited (Seg) b) Avani Cimcon Technologies Limited c) Celestial Labs Limited d) E-Zest Solutions Limited e) Flextronics Software Systems Limited (Seg.) f) Ishir Infotech Limited g) KALS Information Systems Limited (Seg) h) Lucid Software Limited i) Tata Elxsi Limited Se j) Thirdware Solutions Limited k) Wipro Limited (Seg) 7.2 Without prejudice to transfer pricing documentation, the learned AO/DRP/TPO has failed to appreciate the fact that the following companies are not functionally comparable to the software development segment of Appellant, therefore, the learned AO/DRP/TPO has erred in law and in facts by considering them as comparable companies: a) Helios & Matheson Information Technology Limited b) Infosys Technologies Limited 8. The learned AO/DRP/TPO and the Hon'ble DRP have erred in wrongly computing the operating profit margin of the comparable companies identified in the TIP order; 9. The learned AG/TPO and the Hon'ble DRP have erred in not making suitable adjust....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with an average margin of 14.53%. As margin was between 5% range the assessee held its transaction to be at arms length. The Ld. TPO rejected the Transfer Pricing analysis carried by assessee as according to Ld. AO it suffered certain defects. Applying various filters Ld. AO rejected the comparables selected by assessee. The Ld. TPO undertook fresh search and selected set of following 26 comparables with average margin of 25.14%: Sl. No. Comparables Margin Margin 1. Allsec Transmatic Ltd (SEG) 18.91% 2. Avani Cincom Technologies Ltd 49.97% 3. Celestial Labs Ltd 53.06% 4. Datamatics Ltd -1.81% 5. e-Zest Solutions Ltd 34.85% 6. Flextronics Software Systems Ltd (SEG) 23.85% 7. Geometric Ltd (SEG) 8.42% 8. Hello and Matheson Information Technology Ltd 33.23% 9. iGate Global Solutions Ltd 4.42% 10. Infosys Technologies Ltd 37.76% 11 Ishier Infotech Ltd 29.20% 12. KALS Information Systems Ltd 22.22% 13. LGS Global Ltd 13.95% 14. Lucid Software Ltd * 15.84% 15. Mediasoft Solutions Ltd 0.39% 16. Megasoft Ltd 0.12% 17. Mindtree Ltd (T....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... comparables selected by the Ld. TPO in the final list. 10. Before we undertake the comparability analysis it is sine qua non to understand the functions, assets and risk assumed by assessee under this segment as observed by the Ld TPO. 10.1. Functions As per the taxpayer, there is no change in the functional profile of the taxpayer during the FY 2006-07. The taxpayer being a software development company, performs software development services on a contract basis to its AE, Novellus US. 10.2. Assets As is common in the case of software service provider companies, the technical manpower employed and trained by a company is its most important asset. Assessee also deploys well qualified workforce in its business. Besides that, assessee also owns Computers etc., which are essential to the business of a software development company. The asset profile of the company is given as under in the TP Report Sl No Type of assets Net Block Value (Rs.) as on 31.3.07 1 Computers 53,02,465 2 Office Equipment 50,81,436 3 Furniture & Fixture 36,73,214 4 Vehicles 1,50,206 5 Leasehold improvements 62,09,772 Total ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssions advanced by both sides in light of records placed before us. It has been submitted that, these comparables were considered for exclusion on failing turnover filter in assessee's own case by coordinate bench of this Tribunal for assessment year 2013-14 in ITA No. 2490/B/2017 by order dated 3/2/2021. 14. One of the arguments by the assessee before the Ld. TPO as well as DRP was that these companies had turnover which was in excess of Rs. 200 crores and therefore these companies cannot be regarded as a comparable in the case of the assessee whose turnover was only Rs. 18 crores. The Ld. TPO as well as DRP took the view that the functional comparability of the companies were alone to be seen and turnover was not an important criterion. In ground No. 5(iv), the assessee has challenged the order of DRP in holding that higher turnover is not a relevant criterion for disregarding a company, when it is functionally found to be comparable. The question boils down on application of turnover filter in choosing comparable companies. As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5-8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incuriam as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S. NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Hyderabad under section 35(2AB) of the Income Tax Act." * As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard." 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roducts 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 accept the plea of the Assessee that this company ought not to have been considered as comparable." E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rmed 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 Information Systems (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 set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed." 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able." 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 Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 5.6 On a careful perusal of material on record, and the reply received from this company under section 133(6) we find that this company is involved in various activities as compared to captive software service provider like assessee. It is also observed that in the case of Meritor LVS India Pvt. Ltd. (supra) Ld. TPO used very same 26 comparables for computing arm's length margin of software development service segment direct. This Tribunal after considering the functions performed by this company was of the opinion that it is not comparable to ours captive software development service provider. For coming to this preposition this Tribunal relied upon decision of this Tribunal in case of First Advantage Offshore Services Pvt. Ltd. vs. DCIT in ITA (TP) No. 1086/B/2011 for assessment year 2007-08. Further in case of M/s. Netapp India Pvt. Ltd. vs. DCIT (supra) this Tribunal in case of Lucid Software Ltd. observed as under: Lucid Software Ltd. This comparable was included by Ld. TPO and objected by assessee for its functional dissimilarities. It has been submitted that, this company is involved in R & D with leading scientific institutions. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. ACIT (supra) as under: "3. M/s. Helios & Matheson Information Technologies Ltd. was directed to be excluded by the Co-ordinate Bench in M/s. NXP Semiconductors India Pvt. Ltd. (Supra) vide paragraph 28, which is reproduced here under: 28. As far as. comparable chosen by the TPO at Sl. No. 8 of the final list of comparable Viz, M/S. Helios & Matheson Information Technology Ltd., we find that the said company has been held to be not comparable with a software service provider like the Assessee by the ITAT Pune Bench in the case of FTC Software (India) Pvt. Ltd. ITA. No. 6051PN/2011 (Asstt. Year: 2007-08) order dated 30.4.2013. The following were the relevant observations of the Tribunal: "76 The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Hellos & Matheson information 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 sun and substance, the plea set up b% the aforesaid c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aper book, which is the CONY of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis 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 qua 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 ....