TMI Blog2015 (4) TMI 919X X X X Extracts X X X X X X X X Extracts X X X X ..... the opinion that some more analysis has to be done and we direct the TPO to look into the financial statement of the company and also provide an opportunity to the assessee to submit relevant details to substantiate its claim that Comp-U-Learn Tech India Ltd. is not a comparable company Persistent Systems Pvt. Ltd.is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Thus in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. R Systems International ltd. Unless the financial year-end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in case of Sandstone Advisors (P) Ltd. Vs. ACIT, [2013 (9) TMI 401 - ITAT MUMBAI], the Tribunal after consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of AO/TPO for deciding the issue afresh. Non-exclusion of a reasonable amount of employee cost from the operating cost while calculating the operating margin - Held that:- The matter requires re-examination by AO/TPO after verifying the cause for quantum jump of salary in the impugned AY. If it is found that part of the employee cost is non-operational, then, suitable adjustment may be given from the operating cost. Risk adjustment and negative working capital adjustment - Held that:- neither in its TP study nor before the TPO and DRP, assessee has submitted any computation made on a scientific basis towards risk adjustment. Though benefit of risk adjustment can be given in an appropriate case, but, it has to be on the basis of facts and evidence and cannot be granted in a routine manner. Though, it may be true, in case of a captive service provider AE takes all major risks. But, at the same time assessee also bears single customer risk, as in the event of any loss or damage to the business of AE assessee is also likely to suffer. Moreover, assessee has to demonstrate risk assumed by each of the comparable companies vis-à-vis the assessee. The basis for adjustment towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which yielded 15 comparable companies with average OP/OC of 9.34%. As the OP to OC ratio of assessee was 9.50%, the price charged to AE was found to be within arm s length. The TPO, though, accepted TNMM as the most appropriate method, but, he nevertheless rejected the TP report of assessee by pointing out various defects and deficiencies in them. TPO was of the view that not only assessee has selected comparables by using multiple year data instead of data relating to the year under consideration, but, assessee has not gone in to the verticals of the software industry and has applied inappropriate filters which has resulted in selection of un-comparables as comparables. Accordingly, TPO rejecting the TP report of assessee, independently undertook a search of data bases, which yielded the following17 comparables with average arithmetic mean PLI of 22.02%.: 1. Akshay Software Technologies Ltd. 2. Bodhtree Consulting Ltd. 3. Comp-U-Learn Tech India Ltd. 4. Igate Global Solutions Ltd. 5. Infosys Ltd. 6. KALS Inf. System (Seg.) 7. LGS Global 8. Mindtree Ltd. (Seg.) 9. Neilsoft Ltd. 10. Persistent Sys 11. RS Software (India) Ld. 12. R Systems Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sasken Communication Technologies Ltd. (seg.) 4 Thinksoft Global Services Ltd. 5 Thirdware Solutions Ltd. 6 Zylog Systems Ltd. 7 Bodhtree Consulting Ltd. 8 Comp-U-Learn Global Tech India Ltd. 9 Igate Global Solutions Ltd. 10 Infosys Ltd. 11 Kals Information Systems Ltd. 12 Tata Elxsi Ltd. (seg.) 7. The submissions of the learned AR in brief in respect of each the aforesaid comparables as submitted in a tabular form are as under: S.No. Name of the comparable Reasons for rejections 1 Bodhtree Consulting Ltd. It is engaged in the business of software products. 2 Comp-U-Learn Global Tech India Ltd. It is functionally different as engaged in software product devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment manufacturers, mobile terminal vendors and semiconductor companies around the world. Offers combination of R D consultancy, wireless software products and software services. Works with network OEMs, Semiconductor vendors, terminal device OEMs and operators across the world. No segment data available. 8. The learned AR submitted that different benches of ITAT including the Hyderabad Benches from time to time and for different assessment years including the asst. year under consideration have considered comparability of the aforesaid companies with a software development service provider and held these companies not to be comparable. In support of such contention, the ld. AR relied upon the following decisions: 1. M/s 3DPLM Software Solutions Ltd. Vs. DCIT, IT(TP) NO. 1303/Bang/2012. 2. ACIT Vs. Hapag Lyoyd Global Services (TS 47 ITAT 2013 (Mum) TP) 3. Triology E Business V. DCIT, (TS 748 ITAT 2012 (Bang) TP) 4. Intoto Software Pvt. Ltd. Vs. DCIT (TS 141 ITAT 2013 (Hyd) TP) 5. NTT Data India Enterprises Applications Services Pvt. Ltd. Vs. ACIT (TS 293 ITAT 2013 (Hyd) TP) 6. Agnity India Technologies Pvt. Ltd. Vs. DCIT (TS 265 ITAT 2013 (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of software products and was engaged in providing open end to end web solutions software consultancy and design development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee as brought on record sufficient evidence to establish that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Bench following the aforesaid decision of the ITAT, Bangalore Bench also excluded these four companies in case of M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT in ITA No. 243/Hyd/2014 dt. 14/11/2014. Respectfully following the decisions of the ITAT, we direct AO/TPO to exclude these four companies. As far as Comp-U Learn Global Tech India Ltd. is concerned, ITAT, Hyderabad Bench in case of M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT (supra) observed as under: 39. The assessee submitted before the DRP that Comp-ULearn Tech India Ltd. was engaged in the development of new software (product development) (page 7 of the Annual Report) in ITES call centre and BPO services (page 11 of Annual Report). It was further submitted that schedule XIII of the Annual Report shows software development expenditure at only 25% of the total expenditure. The TPO extracted the 133(6) notice and held that the company has nil onsite revenue and satisfied all the filters applied by the TPO. We are of the opinion that some more analysis has to be done and we direct the TPO to look into the financial statement of the company and also provide an opportunity to the assessee to submit relevant details to subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding than assessee. As can be seen from the P L account statement of R Systems International Ltd. for the AY 2008-09, a copy of which has been placed before us by ld. AR, the company follows 31st December as its year ending whereas assessee is having its year ending on 31st March. The ITAT Mumbai Bench in case of ACIT vs. Hapag Lloyd Global Services Pvt. Ltd. ITA No. 8499/Mum/10 having found that this company has a different financial year ending than assessee, observed as under: 7.2 The learned Departmental Representative contended that Unless the financial year-end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in case of Sandstone Advisors (P) Ltd. Vs. ACIT, [2013] 32 taxmann.com 216, the Tribunal after considering the prescription of Rule 10B(4) and an another case of Pune Bench of the Tribunal in Honeywell Automation India Ltd. Vs. DCIT (IT Appeal No. 4(PN) of 2008, dated 11/02/2009) has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 10.7 The ld. DR has not brought any material to our notice to demonstrate that the aforesaid finding of the coordinate bench will not be applicable to AY under consideration. Therefore, following the view expressed by the ITAT Bangalore Bench, we exclude this company from the list of comparables. 10.8 As far as I-Gate Global Solutions Ltd. is concerned, it is the contention of ld. AR that the company is having huge turnover of more than ₹ 900 crores, and is a relatively big company havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned AR s contention is the company is also developing products and segmental details are not available relating to costs. On a perusal of the extracts of annual report of the aforesaid company submitted before us by ld. AR it is seen that the company is involved in providing software development services as well as development of software products also. From the breakup of revenue earned during the relevant FY, it is seen that as against revenue of ₹ 40531.20 lakhs earned from software development services, ₹ 6146.43 lakhs were from software products. Though, it appears that substantial revenue is earned from software development services, however, the cost relating to earning of such revenue has to be taken into account. It is the contention of the assessee that segmental details of cost is not available from the annual report. Since the entire annual report has not been placed before us, we are not in a position to give a conclusive finding in this regard. We, therefore, remit the issue relating to comparability of this company for fresh adjudication by the AO/TPO. However, we make it clear that unless segmental details of cost are available, it will be better ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. We agree with the submissions of the ld. AR that every expenditure debited to the P L account cannot be considered as operational in nature. From the observations made by TPO, it appears, he has rejected assessee s claim only for the reason that no such entries were found in the annual report. The TPO has not properly examined the nature of expenditure. However, at the same time, assessee has to demonstrate that such expenditure was not claimed in any preceding assessment years. Therefore, considering the facts of the case, we are inclined to remit this issue back to the file of AO/TPO for deciding the issue afresh after providing reasonable opportunity of hearing to assessee. This ground is allowed for statistical purposes. 17. In ground No. 15, assessee has raised the non-exclusion of a reasonable amount of employee cost from the operating cost while calculating the operating margin. 18. It was contended by assessee before DRP that it maintains excess capacity staff of about 10%. The excess capacity does not generate any revenue on a regular basis but is usef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , but, it did not quantify how each type of risk or the difference in each risk affect the profitability of each of the comparable companies based on the data for FY 2008-09. Ultimately, the DRP rejected assessee s claim for risk adjustment. 23. As far as working capital adjustment is concerned, TPO while computing the ALP made negative working capital adjustment of (-)3.64% which enhanced the arm s length margin of the comparable companies to 25.67%. Before the DRP while objecting to negative working capital adjustment made by TPO, it was submitted by assessee that the TPO considered the closing balances of trade receivables and trade payables instead of average balances current assets and liabilities. Assessee submitted, the TPO ought to have considered entire current assets and liabilities without restricting himself to trade receivables and payables. The DRP however did not find merit in the objections of assessee. The DRP observed that there is no uniformity when definition of items receivables and payables is concerned, as debtors inventories and creditors are categorized differently in different companies. The DRP also observed that neither before the panel nor before TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e given in an appropriate case, but, it has to be on the basis of facts and evidence and cannot be granted in a routine manner. Though, it may be true, in case of a captive service provider AE takes all major risks. But, at the same time assessee also bears single customer risk, as in the event of any loss or damage to the business of AE assessee is also likely to suffer. Moreover, assessee has to demonstrate risk assumed by each of the comparable companies vis- -vis the assessee. The basis for adjustment towards risk must come from assessee s side. As assessee has not properly established its case either before the TPO or DRP by bringing facts and materials on record, we are inclined to remit this issue back to the file of AO/TPO for deciding afresh after affording an opportunity of being heard to assessee. While doing so, AO/TPO must also examine assessee s claim in respect of working capital adjustment. Ground No. 16 17 are allowed for statistical purposes. 27. In course of hearing, ld. AR submitted before us that the TPO has not excluded the domestic sales while computing the ALP. We make it clear that for determining the ALP, AO has to consider the controlled transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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