TMI Blog2013 (4) TMI 741X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 1956, and is a wholly owned subsidiary of M/s.Parametric Technology Corporation, USA (in short PTC USA ). The parent company i.e. PTC USA, is engaged in developing, marketing and supporting Product Lifecycle Management (PLM) and Enterprise Content Management (ECM) software solutions and related services for their clients. The assessee company is engaged in providing Information Technology (IT) services and IT-Enabled services to its parent company i.e. PTC USA. In the IT-Enabled services segment, assessee undertakes designing and developing of software for PTC USA, which in turn is utilized by PTC USA to provide PLM software solutions to its clients. In the IT-Enabled services segment, the assessee is rendering support services (Call Centre services) to the global client-base of PTC USA. 4. In this background, the assessee entered into the following international transactions with its Associate Enterprise (in short AE ) i.e. PTC USA:- Sr. No. Nature of International Transaction Amount (Rs) 1. Provision of IT services 95,59,54,385 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference between the assessee and the TPO can be briefly summarized as follows. Firstly, while adopting the data of the comparable cases for the purposes of comparability analysis, assessee utilized the data of the comparable cases relating to three financial years, including the year under consideration. Accordingly, the PLI of the comparable cases was computed on the basis of the average of three years data, whereas the TPO has utilised the data for the single year, i.e., relating to the financial year under consideration during which the impugned international transactions have been carried out. Secondly, the TPO has applied Related Party Transaction (RPT) filter in order to ascertain the comparable cases, which was hitherto not considered by the assessee during its Transfer Pricing study. Notably in the proceedings before the TPO, assessee had put forth that the cases having 10% or more related party transactions (i.e., RPTs) should be excluded. The TPO has, however, considered 25% of the appropriate base i.e. either sales or expenses, as the threshold limit for application of the RPT filter. Thirdly, the TPO rejected certain comparables selected by the assessee on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sonata Software Ltd. 21.47 5 Synetairos Technologies Ltd. 19.24 6 Akshay Software Technologies Ltd. 4.78 7 Mindtree Consulting Ltd. 17.34 8 Compucom Software Ltd. (seg) 35.63 9 Helios Matheson Information Technology Ltd. 36.63 10 Transworld Infotech Ltd. 32.88 11 KALS Information Systems Ltd. (seg) 30.55 12 ICSA (India) Ltd. (seg) 56.16 13 ICRA Techno Analytics Ltd. 11.64 Arithmetic Mean 25.24 11. In this regard the first plea of the assessee is that the items at (1) and (8) namely, FCS Software Solutions Ltd. and Compucom Software Ltd. (seg) have been wrongly included by the TPO in the set of comparables. The ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided by (Rs.131.27 + ₹ 107.58) multiplied by 100. 13. Ostensibly, the aforesaid calculation results in RPTs of 15.40% which is below the filter of 25% adopted by the TPO and accordingly, it was not excluded. However, it is quite evident that the denominator of ₹ 238.85 crores adopted by the TPO is wrong in as much as it includes total expenses also whereas as per TPO s own observations, there are no RPT expenses. The numerator comprises of only the sales to related parties and no RPT expenses. Therefore, the adoption of the denominator, i.e., the base, by considering total sales plus total expenses in the present case where there is no RPT expenses would lead to a misleading result. If the denominator is restricted to the total sales in the present case, as there are only RPT sales, the result would be percentage of RPTs of 28.10%, i.e, ₹ 36.89 crores divided by ₹ 131.27 crores. The case of the assessee is that even by applying the RPT filter of 25% envisaged by the TPO, the said concern is excludible as it has RPTs vis- -vis its total transactions in excess of 25%. In view of the aforesaid factual matrix, we hold that FCS software ltd is excludible from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said concern s application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee s IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erted that the application software segment of the said concern is not comparable to the assessee s segment of IT services. 20. With regard to the inclusion of Helios Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables. 21. The assessee has assailed the inclusion of ICSA India Ltd., appearing at item (2) in the Tabulation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices segment, the percentage comes to 3.84%. The Ld. Counsel pointed out that the percentage of 2.04% of R D expenditure computed by the TPO was after considering the total turnover of the said concern including that of the product and projects related to power sector segment. It is submitted that the aforesaid action of the TPO is wrong, firstly the R D expenditure has been incurred only for the software services/embedded services segment, and secondly, it is wrongly compared with total turnover which included the turnover of products and projects related to power sector segment whereas the TPO has only adopted the software services/embedded services segment for the purposes of comparability analysis. Factually speaking, we find no reasons to disagree with the plea set up by the assessee. Evidently, the TPO has not disputed the adoption of quantitative filter of 3% of R D expenses. However, the TPO computed the R D expenditure at 2.02% of the total sales which is ostensibly incorrect in as much as the expenditure in question has been incurred only for the software services/embedded services segment (which has been adopted as comparable segment) and it cannot be compared vis- -vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP of the international transaction relating to the IT services segment in terms of our aforesaid discussion. 25. Now, we take for discussion the adjustments made in ITEnabled services segment, wherein the TPO selected the following comparables:- Sr.No. Company OP/OC% 1 Ask Me Info Hubs Ltd. (Shreejal Info Hubs Ltd.) 5.67 2 Cosmic Global Ltd. (Tulsyan Technologies Ltd.) 11.75 3 Maple E-Solutions Ltd. 34.32 4 Transworks Information Services Ltd. (Aditya Birla Mandir) 12.45 5 Triton Corpn Ltd. 32.36 6 CMC Ltd. (seg) 31.92 7 National Securities Depository Ltd. (Seg) 29.17 8 Apex Advanced Technology Pvt. Ltd. 39.73 9 Visesh Infotechnics Ltd. (seg) 77.31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring at item (8) in the Tabulation at para 25 above. In this regard, the plea raised by the assessee is that the said concern is functionally different in as much as it is engaged in database creation business and the information in public domain does not throw any light on the exact nature of services rendered by the said concern. In the absence of sufficient data for conducting the comparability analyses, the plea set up by the assessee is that the said concern be excluded from the list of comparables. The Ld. Counsel for the assessee had referred to the written submissions made before the lower authorities, which are placed at pages 420.28 and 823 of the Paper Book. The TPO has discussed the issue in para 6.9.5. of his order. 29. After having considered the rival submissions and the material referred to by the assessee, in our considered opinion, no justifiable grounds have been raised by the assessee to claim exclusion of the said concern. While the assessee may be correct in asserting that the said concern is engaged in database creation services and that the assessee does not engage in creation of any database for its clients. However, it is to be noticed that the functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included. 31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available information, the said concern has related party transactions as reported by the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds. 32. The next issue raised by the assessee is with regard to the inclusion of M/s.Vishesh Infotechnics Ltd. (segment) in the list of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said concern is showing a profit margin of 77.31% in this year and comparing it with 49.64% in the preceding year and 53.66% of the succeeding year, it is obvious that due to the qualitative difference in rendering of services, though in the IT-Enabled services segment, the two concerns cannot be meaningfully compared. Therefore, in our view, the said concern was liable to be excluded for the purposes of carrying out the comparability analysis. 35. The last issue raised by the assessee is with regard to the inclusion of M/s.Informed Technologies India Ltd., appearing at Item (11) in the Tabulation, in para 25 above. On this aspect also, the assessee has raised two-fold grievances, namely that the said concern was rendering high end KPO services apart from rendering the routine IT-Enabled services and secondly, there was inconsistency in operating margins in as much as in the earlier years, it had incurred losses of 66.34%, 76,24%, 44.44% on one hand and earned a meager profit of 5.34% in the instant financial year. The Ld. Counsel for the assessee referred to the written submissions made to the lower authorities on the above lines, copy of which is placed in the Paper Book at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the relevant extract of the Annual Report of the said concern placed at pages 190 to 191 of the Paper book. A reference has also been made to the written submissions made to the lower authorities, copy of which has been placed in the Paper Book at page 420.25 to 420.26. 40. At the time of hearing the Ld. Counsel has referred to the extract of the Profit Loss Account of the said concern, which is at page 420.26 of the Paper Book to point out that the analysis would show that the said concern is predominantly engaged in providing BPO services. 41. We have considered the rival stands and find that the plea of the assessee is well founded in as much as out of the total revenue of ₹ 9.84 crores as much as ₹ 8.63 crores is earned from BPO operations, which is 87% of the total revenue. The income from transportation and rental is quite insignificant compared to the total revenues earned, and therefore, in our view, the functional similarity of the said concern is liable to be appreciated and the same is includible in the list of comparables. The TPO, in our view, was not justified in excluding the said concern from the list of comparables. 42. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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