TMI Blog2015 (5) TMI 637X X X X Extracts X X X X X X X X Extracts X X X X ..... ot comparable by observing that it was into the software development services. Infosys Ltd. & Wipro Ltd.cannot be considered a comparable as Infosys Ltd. is a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, on site and offshore services, etc. KALS Information Systems Ltd.the revenues of this company under the segment taken by the TPO include not only Software development services, but also Training. Since the assessee is only engaged in rendering software development services without carrying out any specific commercial training activity, we fail to appreciate as to how this company on a segmental level, consisting of revenues from both Software development and Training, can be considered as comparable. Lucid Software Ltd. direct not to treat this company as comparable as this company is valuing the software products developed in-house on the basis of costs directly attributable to the development of software and in respect of each of the products so developed, it is amortizing total expenditure over a period of 36 months from the launch data. This is a different and unique method of amortizing cost over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the addition on account of transfer pricing adjustment amounting to ₹ 7,03,80,590/-. 4. Briefly stated, the facts relating to this ground are that the assessee is a wholly owned subsidiary of Global Logic, US. This group is engaged in providing value-driven software product lifecycle solutions which meet the strategic objectives of its clients in the industries such as Telecom Mobile, Health care and Travel. The assessee, an Indian company, is engaged in the provision of software development services and also maintenance and repair work, testing, quality assurance and other information technology services to its overseas group companies. The assessee gets remunerated by its foreign AE with cost plus 15% mark-up. The assessee reported the international transaction of: Provision of software services worth ₹ 93,64,04,329/-. The transactional net margin method (TNMM) was employed as the most appropriate method with Profit Level Indicator (PLI) of Operating profit to Total cost (OP/TC) for demonstrating that its international transaction was at arm s length price (ALP). The assessee declared its operating profit margin at 13.34%. Certain comparable companies were ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. 11.17 4. Tata Elxsi Ltd. (Seg) 26.62 25. Thirdware Solutions Ltd. 21.97 26. Wipro Ltd. (Seg.) 34.71 5. After allowing working capital adjustment, the TPO determined arithmetic mean margin of the comparable companies at 23.47%. This led to the proposal for a transfer pricing adjustment of ₹ 7,03,80,590/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). Eventually, the AO made the above-said addition of ₹ 7.03 crore on account of transfer pricing adjustment. The assessee is aggrieved against this addition. 6. We have heard the rival submissions and perused the relevant material on record. The ld. Counsel for the assessee submitted at the outset that he was opposing the inclusion of a few companies by the TPO in the final list of comparables and if this contention gets accepted, then there will remain no need to argue other issues on merits. He submitted that Motorola Solutions India Pvt. Ltd., and Toluna India Pvt. Ltd., are both engaged in pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 15% on costs incurred. This company also does not own any intangibles and conducts no research and development activities, like the instant assessee. The Tribunal recorded in para 8 of its order that this company is not only a software service provider, but also a software developer. Since income from providing software services and software development was in a common pool, the Tribunal considered the companies engaged either in software development or providing software service or doing both as functionally comparable by excluding only those companies which were engaged as non-contract software developers having intellectual property rights over the products developed by them. 8. Having seen the functional profile of these companies, in comparison with that of the assessee, it can be concluded that the assessee is also working as a captive software developer and also providing software services. Our this conclusion follows from the functional profile of the assessee company which provides not only for software development, but also for maintenance and repair work and other IT services. The ld. DR was also fair enough to accept that there is no difference in the functional p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company. Neither separate profits are available, nor there is any measure provided for segregating profit on sale of software products from the overall profit of this company for finding out a comparable segment similar with that of the assessee company. As the profits of the software development portion cannot be ascertained, we hold that it cannot be considered as comparable on entity level. We, therefore, order for the exclusion of this company from the final set of comparables. (ii) Celestial Bio Labs Ltd. 11. The TPO observed that this company was categorized as software development service provider. The assessee objected to the inclusion of this company on the ground that it was not only into the business of software development, but also into software products and no segmentwise break-up of the profits was available. It was also submitted that this company was developing biotechnology products and providing related research and development services. Not convinced with the assessee s submissions, the TPO included this company in the list of comparables. The DRP affirmed the opinion of the TPO on this score. 12. After considering the rival submissions, we fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management services, offshore delivery, project management services, public sector services, maritime practices and executive education information system, etc. The above description of the nature of works carried out by this company manifests that the character of services provided by the assessee company cannot at all be considered as comparable with this company. Similar view has been taken by the Tribunal in the case of Toluna India Pvt. Ltd. (supra). Following the same, we direct it to be considered as not comparable. (v) Infosys Ltd. 17. The TPO included this company despite the assessee s objections that it was a very high turnover company with functional dissimilarity. 18. It is an undisputed fact that the assessee rendered services to its AEs without the assistance of its intangible assets or by retaining any rights in intellectual property in the work done by it. In contrast to that, Infosys Ltd. is a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, on site and offshore services, etc. This company cannot be considered a comparable. Our view is fortified by the judgment of the Hon ble jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Pvt. Ltd. (supra). We direct not to treat this company as comparable. (viii) Megasoft Ltd. 23. The TPO included this company in the list of comparables by observing that its Consulting Division was into software development services and, hence, qualified all the filters applied by him. The objection of the assessee that this company was also a software product rather than a pure software service provider, was held to be not material. 24. It can be observed from the TPO s order itself that the major revenue of this segment of the company is from customization which is in the nature of software development services and that the company s internal packaged software products constitute 35% of the revenues of this division. When the TPO himself is admitting that the total revenue under this segment of Megasoft Ltd. comprises 35% from the sale of software products, we fail to comprehend as to how this segment of the company can be considered as comparable with the assessee company, which is not into selling any software products but is a captive software developer. We, therefore, order to treat this company as incomparable. Similar view has been taken by the Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of certain parameters which are fully met with in the context of the instant assessee as well. The Tribunal in the case of Motorola Solutions India Pvt. Ltd., and Toluna India Pvt. Ltd., has also directed the exclusion of this company from the list of comparables. We order accordingly. 32. The ld. AR submitted that if the above companies are removed from the final list of comparables, then, there will remain no scope for any addition on account of TP adjustment and there will be no need to assail other points. We find that all the above companies have been excluded by the Tribunal in Toluna India Pvt. Ltd. and/or Motorola Solutions India Pvt. Ltd. As it is an admitted position that the functional profile of both these companies either on entity or segment level is similar to that of the assessee company, we pronounced on the conclusion of hearing about the exclusion of these companies from the list of comparables. As such, no further arguments were advanced by the ld. AR. Under such circumstances, we set aside the impugned order and send the matter back to the AO/TPO for a fresh computation of ALP of the international transaction undertaken by the assessee in confor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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