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TMI Blog2015 (2) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... e of IT enabled services, transaction processing and data processing services to its associated enterprises (AEs). The assessee reported certain international transactions in Form No.3CEB. In the present appeal, we are concerned only with the international transaction of rendering IT support services to McGraw Hill Education (Asia), Singapore with a value of Rs. 4,07,64,433/-. The assessee's gross revenue from the `Publishing segment' amounted to Rs. 108.94 crore with operating profit of Rs. 18.75 crore. In the `Back office support services' segment, the assessee earned a gross revenue amounting to Rs. 4.07 crore with operating profit of Rs. 37.05 lac. Though the assessee maintained books of account on aggregate basis combining the transactions of these two major segments, however, for the purposes of transfer pricing analysis, it splitted its combined results into Publishing business segment and Back office support services segment. The assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method for the international transactions under both the above segments. It disclosed the Profit Level Indicator (PLI) as ratio of Operating profit to Operating cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by it to the AEs, the relevant part of which is as under:- "Back office support services provided by TMH India are in the nature of routine IT administration and support and software support type of services related to data and transactions." A perusal of the Agreement between the assessee and its AEs divulges that the assessee rendered 'general accounting services, accounts payable services, payroll processing services, any other administrative and accounting services' to its AEs. The TPO has designated such services as `software development services', whereas the assessee is contending that the services rendered by it do not fall in the realm of `software development services'. 5. At this stage, it is relevant to understand the difference between a software service company and a software product company. A Software service company may again be of two types, viz., a company providing software development services and a company providing software services other than software development services (hereinafter also called 'a company providing non-development software services'), though both render software related services. In order to properly appreciate the vital difference bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a software in itself or a stage in the ultimate creation of a software, the output of the later is the processed information from the raw data obtained with the help, inter alia, of a software. The later company does not create or develop any software but simply uses an already existing software. From the above discussion, it is overt that as a software product company cannot be compared with a company providing software development services, similarly, a company providing software development services is as different from a company providing non-development software services as is chalk and cheese. 6. Before embarking upon making a comparison of the nature of services rendered by the companies, which the assessee is agitating in the present appeal, we would like to mention that the TPO identified 26 companies as comparable. When we turn to the facts of the instant case, it is found that the TPO categorized the assessee as a software development services provider. However, we have noticed supra from the nature of services actually rendered by the assessee to its AEs, that it is a provider of software non-development services. With this background in mind, we will proceed to exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eking information from this company u/s 133(6) of the Act, the TPO found it to be qualifying all the filters. That is how this company was held to be comparable. The assessee is aggrieved against the inclusion of this company in the final set of comparables. 8.2. After considering the rival submissions and perusing the relevant material on record, it can be noticed from the TPO's observations that this company is into software development. From the Annual report of this company, a copy of which is available in the paper book, it can be seen that this company is engaged in providing software development services. In view of the fact that the assessee is not providing any software development services, this company cannot be considered as comparable. We, therefore, order to eliminate this company from the list of comparables. (iii) Celestial Labs Ltd. 9.1. The TPO observed that this company is engaged in the provision of software development services. Notice u/s 133(6) of the Act was issued. As per the reply received from the company, the TPO noted that: "It is mainly a software development company" qualifying all the filters. He, therefore, included this company in the list of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustry." In view of the fact that it is a software products company and is also providing software development services, even the segmental results of software development services cannot be equated with the activities undertaken by the assessee for its AEs. We, therefore, order to exclude this company from the list of comparables. (v) Helios & Matheson Information Technology Ltd. 11.1. The TPO included this company in the final set of comparables by noticing that it was engaged in the similar business activity. 11.2. After hearing the rival submissions and perusing the relevant material on record, we find from the Annual accounts of this company, a copy of which is available on record, that it is engaged into similar business activity as is done by the assessee. After going through some pages of the Annual report, giving details about the nature of business activity done by this company, the ld. AR also candidly accepted that functional profile of this company is comparable with the assessee company. We, therefore, uphold the impugned order on the inclusion of this company in the list of comparables. (vi) Infosys Technologies Ltd. 12.1. The TPO included this company despite th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software product's revenue limited to 3%. On the contrary, it has been mentioned in the Notes to the financial statement that: "the company is engaged in development of software and software products since its inception." The company consisting of STPI unit engaged software products and in development of software is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. When we consider the assessee's functional profile, the only irresistible conclusion which can be drawn is that it is not a comparable company. Accordingly, this company is ordered to be expunged from the set of comparables. (viii) Lucid Software Ltd. 14.1. The TPO included this company in the list of comparables on entity level despite the assessee's objections. 14.2. Having heard the rival submissions and perused the relevant material on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (Seg.) 15.1. The TPO included this company in the list of comparables. The ld. AR argued for its removal on the basis of certain acquisitions done by this company during the year. 15.2. After considering the rival submissions and perusing the relevant material on record, we find from the Notes to Accounts in the Annual report of this company that there was, in fact, amalgamation of Visualsoft Technologies Ltd. Note no. 25 with the caption 'Amalgamation of Visualsoft Technologies Ltd. with the Company' reads that: "The prior year comparatives include effect of amalgamation of Visualsoft Technologies Ltd. ('Visualsoft') with the company w.e.f. 1st October, 2006. The assets, liabilities, rights and obligations of Visualsoft have been recorded at their respective fair values under the purchase method of accounting for amalgamation." 15.3. The Mumbai Bench of the Tribunal in Petro-Aroldite (P) Ltd Vs. DCIT, (2013) 154 TTJ (Mum.) 176 has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. Similar view has been taken by the Delhi Benches of the Tribunal in several cases including Toluna India Pvt. Ltd. Vs. ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, it is abundantly patent that the segmental results taken by the TPO of this company have been influenced by the mergers and acquisitions taken place during the year, thereby making such financial results as incomparable. Following the reason given above, we order for the exclusion of this company from the list of comparables. (xii) Tata Elxsi Ltd. (Seg.) 18.1. The TPO included this company in the list of comparables notwithstanding the assessee's objections about its incomparability. 18.2. Having heard both the sides on this issue and perused the relevant material on record, it is noticed that the TPO has taken 'software development services' segment of this company for the purposes of inclusion in the list of comparables. This segment comprises of three sub-segments, namely, i) product design services, ii) engineering design services and iii) visual computing labs. This information is given on page 118 of the TPO's order. It is this 'Software development and services' segment in entirety, comprising the above three sub-segments, which has been considered as comparable. When we consider the description of the three sub-segments, namely, product design services, engineerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n influence on the determination of transfer prices in relation to the transactions being compared. In view of a plethora of decisions including the Special Bench decision in the case of Aztech Software Technologies Ltd. (2007) 107 ITD 141 (Bang.) (SB), we approve the view taken by the authorities below in considering only the current year's data. This ground is not allowed. 22. Another issue raised by the assessee is against the seeking of information u/s 133(6) of the Act by the TPO from the companies considered as comparable. Here again, we do not find any embargo on the powers of the TPO in seeking the relevant information from the companies. Unless germane information is obtained, we fail to see as to how the TPO can be sure about the comparability or otherwise of a particular company with the assessee. However, the rider is that such information obtained from the companies must be confronted to the assessee before using against it. As the needful has been done by the TPO, we see no reason to disturb the view taken by the TPO in collecting information u/s 133(6) of the Act. 23. No specific argument was advanced in respect of the last issue about the risk adjustment. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X
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