TMI Blog2014 (10) TMI 424X X X X Extracts X X X X X X X X Extracts X X X X ..... or services, Maritime practice and Executive education information systems, etc. - the TPO has taken the figures of this company which represent `Income from software sales and services’ - the assessee is not engaged in software sales - the comparability of Flextronics Software Systems Limited is upheld, as the company cannot be considered as comparable and is directed to be excluded from the list of comparables. Ishir Infotech Limited – Held that:- This company to be comparable to that of the assessee - the company has included Professional fees along with Director’s salary, etc., under the head ‘Administrative expenses’ - When the objection was taken by the assessee before the TPO that the employee cost was only 4% viewing only the ‘Establishment expenses’ in isolation without considering the employee cost included under the head ‘Administrative expenses’, the TPO corrected the position by observing that the employee cost was more than 25% by impliedly including the personnel cost included under the head ‘Administrative expenses’ - The assessee did not challenge the TPO’s calculation before the DRP on this issue - filter of 25% of RPT is good enough to make a controlled transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions of receipt of revenue amounting to ₹ 17,81,69,412/- from Greenfield US, stated to be towards the provision of contract IT services. The assessee benchmarked its international transactions by using Transactional Net Margin Method (TNMM) with the profit level indicator (PLI) of Operating profit/Operating cost. The assessee was compensated by its AE at a mark-up of 15% on costs incurred by it. The assessee claimed that it did not own any intangibles, conducted no research and development activities and, hence, did not carry out any risk related activities. Certain comparables were chosen by the assessee with their financial results for the period ending between 1.4.2004 to 15.02.2007. On the basis of certain filters adopted by the assessee, it was claimed that its international transactions were at arm s length price (ALP). The Transfer Pricing Officer (TPO) considered each and every comparable adopted by the assessee and finally came to the conclusion that out of 13 comparables chosen by the assessee, only two viz., SIP Technologies and Exports Ltd. and Bodh Tree Consulting Ltd., were of suitable comparison. The TPO also rejected the assessee s adoption o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ua non first to analyze the functional profile of the assessee with a view to determine the functionality of the assessee so as to decide whether the companies chosen by the TPO are comparable or not. 6. It can be seen from page 2 of the TPO s order, wherein the business profile of the assessee has been discussed, that the assessee rendered software development and related services to Greenfield Group. For the sake of completeness and to precisely ascertain the assessee s correct functional profile, we refer to the copy of the assessee s Transfer pricing study report which has been placed at pages 1-48 of the paper book. Greenfield Group is a leading provider of internet service solutions. Para 1.2.4 of the TP study report presents that Greenfield US owns virtually all the valuable intellectual property rights and other commercial or marketing intangibles and is involved in complex web based operations. Greenfield US bears all significant business and entrepreneurial risks of the product acceptability and performance in the market and Greenfield India does not own any interest in any of these intangibles. Para 4.2.1 of the TP study report states that Greenfield US is a leading o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is closed and handed over for Data Processing . (c) DATA PROCESSING Data processing is the next step. In this step, the teams prepare the data for presentation to the client. The data is cleaned and re- formatted so that client can analyze it. The output format depends on the requirements specified by the client. To verify that the data is accurate, a sanity check is done by generating various kinds of reports. The reports are called Marginals and Frequencies .. (d) SOFTWARE DEVELOPMENT This group within Greenfield India focuses on development/enhancement of software projects that relate to business automation, increase in efficiency and making the business easier for specific functions performed by Greenfield India. They also contribute to web-site re-design, enhancement, image-makeovers, etc. The software are web based developments using Microsoft Technologies ..Since Greenfield US is an Online Data collection company, all the data is collected online on MS-SQL server databases. The DB s (Database Programmer) help in maintaining the database and running any reporting based on the data. (e) PROJECT MANAGEMENT SUPPORT Currently, Greenfield India employs 13 projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, which makes it vivid that the assessee is both a software service provider and also a software developer. The TPO has nowhere acknowledged in his order, as argued by the ld. AR, that the assessee is only a software service provider. While discussing the Business Profile of the company in para 2.2 of his order, the TPO has mentioned in no uncertain terms that the assessee : is in the business of providing software development and related services to Greenfield Group . As regards the submission about difference between a software service provider and a software product company, we agree, in principle, that a software product company cannot be compared with a simple software service provider. It has been noticed supra that the assessee is not only a software service provider but also a software developer. To contend that all the software product companies are per se incomparable to the assessee, is not fully correct. Before reaching any decision as to comparability or otherwise of a software product company with the assessee, it is paramount to see the nature of software product of that company and its user. If it is such a software product whose license is given to outsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind any merit in this contention raised on behalf of the assessee. It can be seen from the order of the TPO that before including any company in the list of comparables, he gave a show cause notice to the assessee proposing it as comparable vide his office letters, inter alia, the one dated 26.8.2010 and also forwarded soft copies of the data so collected. It was then, that he called upon the assessee to explain its stand. The assessee made detailed submissions before the TPO against the comparability of such companies vide its letters dated 3/14.9.2010 running into more than 100 pages, copies of which are available in the paper book. Through these letters, the assessee objected to treating such companies as comparable giving specific reasons. It is self evident that the assessee could try to distinguish such companies only on the perusal of the data of such companies supplied by the TPO. All the objections taken by the assessee have also been incorporated in the order of the TPO. We fail to understand as to how the ld. AR can raise such a plea in the circumstances as are presently obtaining in this case, that he was not confronted with the material used against him. When the ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A passes the same filter vis-a-vis company C , then company A will find its place in the list of comparables of company C , despite the fact that it was held to be incomparable to company B . The crux of the matter is that the mere fact that company A has been held to be not comparable in a judicial order passed in the case of company B , it cannot be said that company A would automatically cease to be comparable to all the cases to follow. Not only company A held to be incomparable to company B can be comparable to company C , but company X held to be comparable to company Y can also be incomparable to company Z , depending upon the functional profile and the applicability or otherwise of the related filters. There can be no hard and fast rule that if a particular company has been held to be not comparable in the case of another company, then such former company would also cease to be comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile and the applicable filters of the other company. Ergo, this contention raised on behalf of the assessee cannot be accepted. 15. With t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable, if it is otherwise so. 16.4. Since both the objections taken by the assessee against the inclusion of this company are not sustainable, we uphold the inclusion of the Software service segment of Accel Transmatic Limited in the list of comparables. The assessee fails. Avani Cimcon Technologies Limited: 17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to get complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such contention by relying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software development company engaged in providing software development and consulting IT services to its clients. This company was concentrating on internet enabled business information systems in a wide range of industries. Resultantly, this company was included in the list of comparables. 17.2. After considering the rival submissions and perusing the relevant material on record, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and perusing the relevant material on record, we find this company to be comparable to that of the assessee company, because it is also engaged in rendering software development services to outsiders. The ld. AR needlessly tried to distinguish this company by contending that the services rendered by it were different from that of the assessee. We do not find any force in this submission. The comparability of a company is tested on various parameters and a view is taken as to its comparability or otherwise by considering the entirety of the facts and circumstances. Simply because the nature of software development services provided by a company is different from those provided by the assessee, the same does not become incomparable. Here is a case in which this company is also providing software development services as is done by the assessee on contract basis for others without having any intellectual property rights in them. A small variation in the nature of services does not make a company incomparable. It is not a case that the TPO has considered a company rendering managerial or engineering services and treated it as comparable to the assessee rendering software development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in WIMAX, IMS, SIP ISS/ESS domains. This company has its own products such as ASN, WIMAX, Gateway Product with ASN Light. It is further relevant to note that the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO has adopted the relevant figures for comparison. In view of the foregoing discussion, we hold this company to be not comparable and direct its exclusion from the list of comparables. The assessee succeeds. Geometric Limited (Segmental): 22. The assessee has no objection to the inclusion of this company in the list of comparables. Helios Matheson Information Technology Limited: 23.1. The TPO noticed from the annual accounts of this company that it was engaged in the software development services and also qualified employee cost filter. The assessee objected to its inclusion by, inter alia, contending that the PLI of this company was incorrectly worked out by the TPO. Correcting this mistake in calculation part, the TPO held this company to be comparable and determined its revised PLI at 36.63%. The DRP upheld the inclusion of this company in the list of comparables. 23.2. After considering the rival sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees cost was, in fact, more than 25% as was apparent from the information received u/s 133(6) and, further, the RPTs also did not exceed 25%. 26.2. Having heard both the sides and perused the relevant material on record, we find this company to be comparable to that of the assessee. The assessee s objection that employee cost of this company was 4% only, is not correct because of the exercise carried out by the TPO indicating that the employees cost was more than 25%. The ld. DR has taken us through the Annual accounts of this company which show that some part of the employees cost was also included in Administrative expenses apart from direct Establishment expenses. It can be seen that the company has included Professional fees of ₹ 3.41 crore along with Director s salary, etc., under the head Administrative expenses . When this objection was taken by the assessee before the TPO that the employee cost was only 4% viewing only the Establishment expenses in isolation without considering the employee cost included under the head Administrative expenses , the TPO corrected the position by observing that the employee cost was more than 25% by impliedly including th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as comparable, the assessee replied that Lucid Software Limited has developed `Muulam software, the details of which were collected from the website of Lucid Software itself. In view of such details, it was contended that this company was a software product company having intellectual property rights. Rejecting the assessee s objections, the TPO included this company in the list of comparables. 29.2. After considering the rival submissions and perusing the relevant material on record, it can be seen that the assessee categorically objected before the TPO to the effect that this company was mainly into software product business having license of such products. The TPO ignored the assessee s submissions despite the fact that sufficient material taken from the website of this company was placed before him in support of the contention. It can be seen from page 192 of the paper book, being Notes to the balance sheet of Lucid Software Ltd., that this company developed software products in-house. The expenditure so incurred on product development has been duly capitalized by Lucid Software Ltd. These facts amply bring out that Lucid Software Ltd. cannot be considered as comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds. Quintegra Solutions Limiteda: 34. The assessee has no objection to the inclusion of this company in the list of comparables. R S Software (India) Limited: 35. The assessee has no objection to the inclusion of this company in the list of comparables. R Systems International Ltd. (Segmental): 36.1. The TPO included this company in the list of comparables and determined its OP/OC at 15.07%. The ld. AR has no objection to the inclusion of this company in the list of comparables. His only objection was confined to the calculation of OP/OC at 15.07%. He contended that the TPO erred in excluding the amount of `Provision for doubtful debts from Operating costs. 36.2. We are not agreeable with the contention advanced on behalf of the assessee for the reasons set out by the TPO on this issue at page 126 of his order. It has been mentioned that the provision for doubtful debts/advances was excluded because these were not recurring for the last three years and were also not at consistent level. We fail to appreciate as to ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes developing technology intellectual property. As the nature of activity carried out by the assessee in question is nowhere close to that of Tata Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds. Thirdware Solutions Limited (Segmental): 40. The assessee has no objection to the inclusion of this company in the list of comparables. Wipro Limited (IT Services segment): 41. After considering the rival submissions and perusing the relevant material on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) has upheld the exclusion of this company also from the list of comparables on the basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds. 42. In view of the fore ..... X X X X Extracts X X X X X X X X Extracts X X X X
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