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TMI Blog2015 (6) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... . The entire controversy in this appeal is restricted to the international transaction of 'Provision of software development services' with the transacted value of Rs. 158,09,04,878/-. The other international transaction of `Reimbursement of expenses' has been accepted by the authorities to be at arm's length price (ALP). On a reference made by the AO to the Transfer Pricing Officer (TPO) for the determination of the ALP, the latter noticed that the assessee employed Transactional Net Margin Method (TNMM) to demonstrate that the international transaction of `Provision of software development services' was at ALP. The assessee chose Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC). The assessee selected 23 companies as comparable. The mean margin of such comparables, on the basis of current/multiple-years data was computed at 14.84%. As the assessee's OP/TC stood at 12.47%, it was claimed that the international transactions were at ALP. The TPO shortlisted 19 companies as comparable and computed the arithmetical mean of their PLI at 24.82%, after allowing working capital adjustment of 1.38%. In such calculation, the TPO used current year data alone. By applying ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads:- "Marketing Function Global Logic Inc and GIPL's marketing staff initiates contact directly with a potential client. Thereafter, Global Logic Inc prepares and submits a proposal to the client, irrespective of whether the client lead is provided by GIPL or GlobalLogic Inc., giving the scope and the technical aspects of the project. Bid costs are borne by GlobalLogic Inc. Hence, though primary responsibility for identification of customers and marketing the GlobalLogic Groups' services lies with GlobalLogic Inc., GIPL also undertakes marketing function to the extent of identification of client leads. Provision of Services GIPL is responsible for development of software under the projects sub-contracted to it by GlobalLogic Inc, GIPL employs the resources required for development of software, both in respect of on-site or offshore projects. However GlobalLogic Inc, retains overall project management responsibility for the entire contract with the end customer. This includes all financial responsibility for the work as well as billing. Testing & Quality Control The last step involves testing the software that has been developed. GIPL has the responsibility of testing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT and IT enabled Services. This is stated to be the only Agreement under which the services under consideration were rendered. It can be seen that to some extent, there is an apparent conflict between the Agreement and the Transfer Pricing Study report inasmuch as the latter, apart from the aforesaid services set out in the Agreement, also refers to the rendering of Marketing Function and Administrative Support services, which do not figure in the Agreement. As the TPO has treated the entire amount under this international transaction as consideration for rendering `Software development services' and benchmarked it accordingly, without separately taking cognizance of any Marketing and Administrative services, we leave this issue here only and do not propose to start everything afresh by setting up an altogether new case. It is for the TPO to analyze the functions performed in proper perspective and in the light of the material available on record and then reach a positive conclusion about the nature of activity carried out by the assessee in an international transaction. 8. With the above understanding of the nature of software development and maintenance functions carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. VS. ACIT (2015) 152 ITD 0158 (Delhi), the Tribunal ordered for the exclusion of this company from the list of comparables. In reaching this conclusion, the Tribunal also observed that apart from rendering software development services, this company was also engaged in the sale of software products and the accounts maintained by it were at entity level without there being any segregation of revenue from software development segment. Adverting to the facts of the instant year, it is observed that the assessee specifically argued before the TPO that the data for the instant year was not available which objection was also repeated before the DRP, but, without any success. Be that as it may, the fact that this company is also engaged into software products, apart from rendering software development services, has not been controverted by the ld. DR with any cogent material. Respectfully following the view taken by the Tribunal in the assessee's own case for the immediately preceding year, we order for the exclusion of this company from the list of comparables. Infosys Technologies Ltd. 11. The TPO noticed that this company was finding place in the accept/reject matrix but was rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the list of comparables. KALS Information Systems Ltd. (seg.) 13. The assessee rejected this company in its TP documents by considering it as 'functionally different.' The TPO, on the basis of certain information collected u/s 133(6) from the company, observed that its business activity was into two segments, namely, (i) Software development services; and (ii) Training. By considering the data available before him, the TPO included the 'Software development services' segment into the list of comparables. The assessee is aggrieved the inclusion of this company on segmental level. 14. We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company which is available on pages 349 onwards of the paper book. It can be observed from page 358 of the paper book that the segmental information pertains to `Application software' and `Training'. Under the `Application software' segment, the company has also included its income from software products. Note 1 to the Financial statements on page 357 of the paper book evidently provides that : 'The company is engaged in development of Software and Software product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent from most of the outsourcing firms because we are focused exclusively on the software product development.' The same thing has been mentioned on page 388 of the paper book that Persistent Systems Ltd. : 'is predominantly engaged in outsourced Software Product Development services for independent Software Vendors.' When we peruse page 389 of the paper book, it becomes manifest that apart from earning revenue from licensing of products, it has also earned revenue from Royalty which is recognized on sale of products in accordance with the terms of the relevant agreement. The ld. AR contended that revenue from Royalty was considered by this company as part of revenue from `Software development services' segment, which has not been controverted by the ld. DR with any cogent material. The Bangalore Bench of the Tribunal in 3DPLM Software Solutions Ltd. Vs. DCIT (ITA No.1303/Bang./2012 vide its order dated 28.11.2013, for the identical assessment year, i.e., 2008-09, has held Persistent Systems Ltd., to be a company engaged in product development and product design services and hence functionally different from a software development services provider. Similar view has been taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company; very high turnover; owning significant IPRS in the form of patents; and engaged in R& D activity. The assessee failed to persuade the DRP to fall in line with its reasoning for the exclusion of this company from the final set of comparables. That is how, the assessee is before us. 20. We have heard the rival submissions and perused the relevant material on record. It is noticed that the TPO has taken 'Software development' segment of this company on standalone basis. We agree with the TPO that super normal profits or very high turnover cannot be criterion for treating an otherwise functionally comparable company as incomparable. However, the fact remains that this company own significant IPRS in the form of patents which are obviously used in the rendering of software development services. Apart from that fact, this company is engaged in R&D activity. Per contra, the assessee in question is only a captive software development service provider not owning any IPRS. Owning or not owning IPRS in the form of patents in software developed by a company has an important bearing on the profit earned by it from the 'Software development services' segment. A company which does no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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