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TMI Blog2014 (12) TMI 1195X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Panel ('Ld. DRP') is bad in law and void ab-initio. 2. The Ld. TPO/Ld. AO erred in enhancing the income of the Appellant by Rs. 78,53,275 holding that the international transactions pertaining to its contract software development business segment do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in; 2.3 including certain 'companies that are not comparable to the Appellant in terms of functions performed, assets employed (or size) and risks assumed; 2.4 including certain companies that are functionally not comparable to the Appellant inasmuch as they have significantly high turnover, own significant intangibles and/ or own and develop software products whereas the Appellant is only a service provider as regards its captive contract software development services segment; " 3. Brief facts of the case as per para 3 at page 3 of the DRP order read as under:- "The assessee is engaged in providing Software Development and IT consulting services. It is a captive service provider and the entire revenue earned from the services is received from its various AEs. During the relevant year, the assessee undertook the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forded an opportunity to file its objections before DRP-II, New Delhi and the assessee filed its objections on 5.1.2012 to the draft assessment order. The DRP, after consideration of the objections of the assessee, declined to interfere with the action and order of the TPO as well as in the draft assessment order and rejected the objections of the assessee by issuing directions to the AO u/s 144C(5) of the Act. The AO passed assessment order u/s 143(3) r/w section 144C of the Act on 20.9.2012 by adding the sum of Rs. 74,18,897/- to the total income of the assessee being the difference between the transaction value and the ALP as computed by the TPO. Now, the aggrieved assessee is before this Tribunal with the grounds as reproduced hereinabove. 6. We have heard arguments of both the sides and carefully perused the relevant material placed on record. Ld. Counsel for the assessee mainly contended that the DRP was not justified in accepting the following companies as suitable comparables and enhancing the income of the assessee by Rs. 78,53,275/- by holding that the international transaction pertaining to its contract software development business segment do not satisfy the arm's leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Counsel of the assessee has placed reliance on the decision of M/s Trilogy E-Business (ITA No. 1054/Bang/2011). iv) Persistent Systems Pvt. Ltd. 12. Ld. counsel of the assessee submitted that Persistent Systems Ltd. eserves to be excluded by the same reasoning applying the comparable principles due to different personal profile in comparison to the assessee company. The ld. Counsel elaborating arguments further contended that the annual report of the Persistent Systems Ltd. clearly states that the company develops and owns software products and also earns revenue from licensing of software products. Ld. Counsel placed reliance on the decisions of the coordinate benches of the tribunal in the cases of Bind View India P. Ltd. (supra), Trilogy E-Business (supra) and Telcordia Technologies India Pvt. Ltd. (supra) wherein this company has been held to excludable from suitable comparables by applying comparability principles. v) Quintegra Solution Ltd. 13. Ld. Counsel of the assessee further submitted that Quintegra Solution Ltd. be excluded due to different functional profile, high Ad-marketing spend and research and development and super normal growth as compared to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant financial year in respect of its software services filing within CSD segment, the assessee provided contracts services to its Associated Enterprise (AE) i.e. Pyramid USA. Elaborating the functional profile of the assessee company, it was further submitted that the initial code design as well as specification for software development was to be carried out by the assessee and undertaken and provided by the AE Pyramid USA and the assessee merely undertakes contract software services in line with the detailed specifications provided by the Pyramid USA which include the content activities, time schedules, quality assurance etc. necessary to reach expected outcome/development/assignment. 17. Reiterating the assessee's objections before the DRP, ld. Counsel further contended that the assessee was responsible for development/coding and testing functions based on the functional specifications received from AE Pyramid USA on a sub-contract basis. Ld. Counsel further elaborated that owing to the captive nature operations of the contract software development in CSD segment, the assessee did not undertake any significant R&D or advertising/brand building and, therefore, also does not fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO in the final set of comparables but the assessee is not able to substantiate that these are not suitable comparables as the facts and circumstances of every case are always different from another case. The DR also contended that the assessee could not demonstrate that the comparables adopted and added by the assessee in the fresh search were found to be suitable comparable for benchmarking the international transaction undertaken by the assessee in the CSD segment during the relevant financial year. 20. On careful consideration of above rival submissions and contentions and careful perusal of the relevant material placed on record, at the outset, we note that as per DRP order internal page 3, the assessee is engaged in providing contract software development and IT consulting services and assessee is a consultancy service provider and the entire revenue earned from the services which are received from its various Associated Enterprises (AE). As per the order of the DRP, it is also undisputed that the assessee is a consultancy services provider and the entire revenue earned from the services which are received from its various Associated Enterprises. As per the order of the DRP, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (supra), the ITAT Mumbai held as under:- "40. Mumbai Tribunal in case of Telcordia technologies India Pvt Ltd [ITA No. 7821 (mum)/2011] held [refer pgs45 - 46 of the compendium of Case Laws/ Commentary] ""The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sales revenue, stage of business cycle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at Rs. 69,552 crores, which comprises of brand value itself at Rs. 22,915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India's No.2 software service exporter and Third in the world as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than Rs. 13145 crores and expenditure on advertisement/sales promotion and expenditure on R & D is at Rs. 69 crores and Rs. 167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f above and in the light of ratio of the decision of Pune Bench of the Tribunal in the case of Bindview India P. Ltd. (supra), we observe that Kals Information Systems has been found functionally different from the software development services provider companies and KALS was rejected as a suitable comparable. The relevant operative part of the said decision of Pune Tribunal reads as under:- "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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding contract software development services only. The relevant operative part of the decision of Bangalore Tribunal reads as under:- "As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia technologies Pvt. Ltd. v. ACIT - ITA NO.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, AvaniCincom cannot be considered as comparable to the assessee who was rendering software development services only. " "We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation about profitability from sale of products and profitability from provision of services, this company should be excluded from the final set of comparables applying comparability principles enunciated in the aforementioned orders of the Tribunal. 33. Ld. DR, supporting the action of the TPO and DRP, submitted that the facts and circumstances of every case are different from another, therefore, arguments of the assessee are not acceptable. However, ld. DR fairly accepted that the turnover of the Persistent System Ltd. is more than Rs. 200 crore and more than 50 times of assessee's turnover. 34. On careful consideration of above, we take note of the decision of ITAT Bangalore in the case of M/s 3DPLM Software Solutions Ltd. vs DCIT (supra), wherein following the principles enunciated in the decision of ITAT Mumbai In the case of Telecordia Technologies Ltd. (supra), it has been held that Persistent System was engaged in the product development and product design services while the assessee of that case/appeal (M/s 3DPLM Software Solutions Ltd.) was a software development services provider. The Tribunal further held that in absence of segmental details/information about segreg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables also included Quintegra Solution Ltd. which also found place in the final set of comparables at sl. No. 9 is also not a suitable comparable. Ld. counsel vehemently contended that as per annual report of the company, Quintegra develops and owns software products such as HBfx, HMIS and EduCampus etc. and in absence of segmental information about profitability from sale of software products and profitability from provision of software development services, this company cannot be held as a suitable comparable. Ld. Counsel has also drawn our attention towards page no. 461 of the Paper Book-I of the assessee and submitted that the company experienced exceptionally and abnormally high growth of 514% in the revenue and 450% in the profit and, hence, the same cannot be a suitable comparable for the assessee company by the same reasoning and applying comparability principles enunciated in the aforementioned orders of the Tribunal. 37. Ld. DR replied that in absence of earlier data, exceptionally and abnormally high growth in revenue and in profit cannot be estimated. Ld. DR further contended that Quintegra Solution Ltd. also provides contract software development services, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approximately 3.73% and 4% of its sales respectively towards R&D and ad-marketing. Thus, Quintegra Solution Ltd. cannot be considered as a suitable comparable company for benchmarking of ALP of the impugned international transactions of the assessee i.e. Pyramid IT India as undisputedly, present assessee company is primarily engaged in provision of contract software development services (CSD segment) and IT staffing services. Therefore, we are inclined to hold that the TPO was not justified in including Quintegra as a suitable comparable in the final set of comparables and we hold that Quintegra Solution Ltd. ought to have been omitted from the final set of comparables for the year under consideration. We order accordingly. Tata Elxsi (Seg) 40. Ld. Counsel during the arguments also contended that Tata Elxsi, having turnover of Rs. 342.86 crore which is more than 50 times of assessee's turnover of Rs. 7.24 crore during the financial year under consideration, is not a suitable comparable for benchmarking ALP of the impugned international transactions undertaken by the assesee with its AE. Ld. Counsel also contended that Tata Elxsi includes product design service which also include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal directed to exclude the same from the list of comparables. The relevant operative part of the order of the Mumbai Tribunal (supra) reads as under:- "Mumbai Tribunal in case of Telcordia technologies India Pvt Ltd [ITA No. 7821 (mum)/2011] [refer pg 48 of the compendium of Case Laws/ Commentary] held: "From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 44. On vigilant consideration of above contentions, we observe that the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kovid-RT - Decision Support System for NDT and Muulam. He has drawn our attention towards pages 522 to 532 of the Paper Book-I of the assessee and submitted that no segmental information for profitability from sale of products and profitability from provision of services is separately available and, therefore, this company should be excluded from final set of comparables. Ld. Counsel has drawn our attention towards various decisions on the issue including decision of ITAT, Mumbai in the case of Telcordia Technologies India Pvt. Ltd. (supra) and submitted that this entity cannot be considered for comparability analysis for determination of ALP in the case of present assessee as present assessee is purely involved in service sector. 47. Ld. DR replied that Lucid Software having turnover of only Rs. 2.31 crore with OP/TC of 14.61% is a suitable comparable for the present assessee. However, ld. DR has not disputed the fact that Lucid Software is actively involved in R&D and also has developed a software product named "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial. 48. On careful consideration of above submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, we reach to a conclusion that Lucid Software is not a suitable comparable for the purpose of determination of ALP of the impugned transaction of the present assessee and this entity deserves to be deleted from the final set of comparables. We order accordingly. 50. On the basis of foregoing discussion, we reach to a final conclusion that the TPO was not justified in including Avani Cincom Tehcnologies, Infosys Ltd., KALS Information System Ltd., Persistent Systems Ltd., Quintegra Solution Ltd., Lucid Software and Tata Elxsi (Seg) as a suitable comparable for the comparability analysis for the purpose of determination of ALP of the international transaction of the assessee pertaining to CSD segment as these companies are not a suitable comparable to the present assessee company in terms of functions performed, assets employed and risk assumed. We also hold that aforementioned all seven companies are functionally not comparable to the assessee inasmuch as some companies have significantly high turnover, own significant intangibles, own, develop and sell specific software products and some companies incur heavy expenditure on R&D and ad-marketing. On the other hand, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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