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2020 (8) TMI 855 - AT - Income TaxTP Addition - international transaction of software development services rendered by the Appellant to its parent company - Comparable selection - Functional dissimilarity - HELD THAT:- Assessee as engaged in providing “software development and IT enabled services” or say engaged in providing “software services”, companies as functionally dissimilar with that of assessee need to be deselected from final list. DRP has upheld the filter of the rejection of the companies with service income less than 75%. E-Infochips Ltd. - Details of margin on hardware sales is not available and if the margin on hardware is too high as compared to software services, the company may not be suitable for comparison. Due to lack of sufficient information in respect of the company available in the public domain, in the interest of substantial justice, we feel appropriate to restore the issue of comparison to the Ld AO/TPO with the direction to the TPO to obtain such information in the form of relevant schedules of the Profit & Loss Account of the said entity as well as the segmental details of the hardware division, if any, directly from the said entity and then decide the issue of comparability. We, therefore, set aside the finding of learned TPO for including the company into set of comparables as well as the direction given by the DRP on this issue and restore the matter to the file of the Assessing Officer/TPO for deciding the same afresh in the light of the observations already made by us, after giving the assessee a proper and sufficient opportunity of being heard. E-Zest Solutions Limited - As far as issue of functional dissimilarity on the ground of conceptualization of the software is concerned, we do not agree with the argument of the learned Counsel of the assessee. although the company is functionally similar to the assessee but in view of the figure of increase in the stock gives rise to the possibility of trading segment. As complete information is not available in public domain, in our opinion, the Learned TPO can collect the relevant information from the company using the authority under section 133(6) of the Act and if he finds that trading segment exist and no separate results are available for the software development segment, then he shall exclude the company from the set of the comparables. Accordingly, we restore the issue of the comparability of the company to the file of the Learned AO/TPO for deciding afresh after providing adequate opportunity of being heard to the assessee. Infosys Ltd. - Tribunal has rejected the company mainly on the ground of giant company vis-à-vis the assessee being a captive service provide. Since this ground of the rejection is valid in the year under consideration also we direct the Learned AO/TPO to exclude this company from the final set of the comparables. Larsen and Toubro Infotech Ltd. - As revenue has been shown from software development services and products and there is no separate segment of the software development services available in the annual report of the company. In such a huge turnover, the composition of revenue from the software development services and from sale of the software products is not separately available in the annual report. In such circumstances, the company cannot be termed as functionally similar at entity level with the assessee, who was engaged in providing software services to its associated enterprises. In view of the functional dissimilarity, we direct the Learned AO/TPO to exclude this company from the final set of the comparables. Persistent Systems & Solutions Ltd - As revenue has been shown from the software services only and no revenue has been shown from sale of the products or from royalty etc. Merely mention of the method of the recognition of the revenue in the notes to the account, cannot indicate revenue has been earned from sale of the products or from the royalty. No other information has been pointed out by the learned Counsel to support his contention that the company is engaged in sale of the products. No such information in respect of sale of products or income from royalty is available in the public domain, therefore in the interest of the justice, we feel it appropriate to restore this matter to the Learned AO/TPO with the direction to gather information using authority under section 133(6) of the Act and if he finds presence of substantial income from sale of the products or royalty and income from software development services cannot be segmented, then the company shall be excluded from the set of the comparable. The assessee shall be afforded adequate opportunity of being heard. Persistent Systems Ltd. - As revenue from sale of software services and product has been shown that ₹ 6,101.27 million. There is no separate bifurcation of the revenue from the software services and therefore in absence of segmental data of software services, the company cannot be included as a comparable at entity level. Accordingly, on the ground of the functional dissimilarity of the entity level, we direct the Learned AO/TPO to exclude the company from the final set of the comparables. Wipro Technology Services Ltd. company is directed to be excluded from the set of the final comparables. Zylog Systems Ltd. - As the Revenue as shown from Software Development services and the products and no separate revenue or segmental result for software development services have been reported in the annual report. In absence of any separate segmental result of software development services available in public domain, we reject the company as comparable on functional dissimilarity at entity level. Accordingly, we direct the Ld. AO/TPO to exclude this company from the set of the final comparables.
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