TMI Blog2014 (12) TMI 1195X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be considered as comparable to the assessee company who was providing contract software development services only. Persistent Systems Ltd. in absence of segmental details/information about segregated income from both the segments, the company cannot be taken into account for comparability analysis and, therefore, Persistent Systems Ltd. ought to have been omitted from the final set of comparable. Quintegra Solutions Ltd. ought to have been omitted from the final set of comparables for the year under consideration as undisputedly, present assessee company is primarily engaged in provision of contract software development services (CSD segment) and IT staffing services Tata Elxsi (Seg) not fit for comparability analysis for determining the ALP of the assessee having turnover of more than ₹ 200 crore and more than 50 times of the assessee’s turnover, also owns several intellectual property rights and intangible assets worth 11.86 crores which are 12% of its total net fixed assets. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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 following transactions: S.No International Transaction Value 1. Contract software development services 7,24,75,317 2. Staffing Services (or also referred to as IT 6,97,70,977 ( Consulting services) Total Value of International Transactions 142,246,294 The assessee charges its AE on Full Time Equivalent basis (FTE) at the rate of US$ 10 per hour. There is no dispute regarding the determination of Arm's Length Price(ALP) of the Staffing services. In respect of contract software development services, the assessee applied the Cost Plus Method (CPM) to benchmark its international transactions. However, the TPO rejected the method chosen by the assessee and used Transaction Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 78,53,275/- by holding that the international transaction pertaining to its contract software development business segment do not satisfy the arm s length principle envisaged under the Act. 1. Infosys Ltd. 2. Kals Information Systems Ltd. (Seg) 3. Avani Cincom Technologies 4. Persistent Systems Ltd. 5. Quintegra Solution Ltd. 6. Tata Elxsi (Seg) 7. Lucid Software 7. Ld. Counsel further contended that the aforementioned companies have been included by the TPO/AO which are not comparable to the assessee company in the terms of functions performed/assets employed (or size) and risk assumed. Ld. Counsel further contended that the TPO/AO also erred in including aforementioned companies which are functionally not comparable to the assessee company inasmuch as they have significantly high turnover, significant intangibles and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate 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 company. Ld. counsel of the assessee placed reliance on the decision of Bangalore Tribunal in the case of M/s 3DPLM Software Solutions Ltd. vs DCIT in ITA No.1303/Bang/2012. vi) Tata Elxsi (Seg) 14. Ld. Counsel of the assessee also contended that Tata Elxsi (Seg) is not a suitable comparable and the same was specifically rejected due to different nature of services, different profile and ownership of intangibles with significant R D leading to development of intellectual property rights. The ld. Counsel pointed out that the software development and service segment of Tata Elxsi includes product design services which also includes design and developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary 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 face any R D and marketing related risk. Ld. Counsel vehemently contended that the international transactions undertaken by the assessee in CSD segment during relevant financial year were duly reported in the accountant s report (Form No. 3CEB) and filed along with the assessee s return of income. Ld. Counsel submitted that the assessee had applied Cost Plus Method (CUP) for benchmarking the above transactions in the TP study but on the directions of the TPO, the assessee undertook a fresh search based on Transactional Net Margin Method (TNMM) and the asseseee was able to demonstrate its functional transaction to be at arm s length ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced 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, it is also undisputed that the assessee is a group company primarily engaged in providing contract computer software development services (CSD segment) and IT software services and assessee was also entitled to avail benefits u/s 10A of the Act and had made necessary statutory filings with the Software Technology Park of India (STPI). 21. From the order of the TPO, we also observe that the TPO did not dispute the receipt of the assessee from its AE i.e. Pyramid USA received towards staffing services/IT selling services but the TPO did not accept the receipt of the assessee from its AE towards production of contract de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself at ₹ 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 ₹ 13145 crores and expenditure on advertisement/sales promotion and expenditure on R D is at ₹ 69 crores and ₹ 167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. 25. In view of above, we are of the considered opinion that Infosys is not a suitable comparable to the case of the present assessee i.e. Pyramid India because there is a vast difference between functional profile of Infosys and the assessee company. We also note that the assessee is only providing contract software development services and IT staffing services and, on the other hand, Infosys being a high turnover giant company having a different functional profile, along with huge expenses on advertising and marketing and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 28. In view of above observations of the Coordinate Bench of the Tribunal and following the same, Bangalore Bench of the Tribunal in the case of M/s Trilogy E-Business (supra), also held that KALS is not a suitable comparable as this company was developing software products and was not merely, purely or mainly a software provider company and, thus, respectfully following the decision of the Tribunal on the issue, we hold that the same company i.e. KALS Information Systems Ltd. is not found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly 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 reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. 31. On the basis of aforementioned discussion, we are of the considered opinion that the assessee company, having turnover of ₹ 7.24 crore only, earns revenue from providing contract development services (CSD segment), staffing services/IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 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 segregated income from both the segments, the company cannot be taken into account for comparability analysis and, therefore, Persistent Systems Ltd. ought to have been omitted from the final set of comparable. The relevant operative part of the order of Bangalore Bench in the case of 3DPLM Software Solutions Ltd. (supra) reads as under:- We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel 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, therefore, the same was properly included in the final set of comparables. 38. On careful consideration of above submissions, we observe that ITAT Bangalore in the case of M/s 3DPLM Software Solutions Ltd. (supra) has held as under:- We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uitable 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 ₹ 342.86 crore which is more than 50 times of assessee s turnover of ₹ 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 design and development of hardware and software and the activities of Tata Elxsi are completely different from contract software development service provider assessee company which also does not have intangible assets and does not incur any expenditure on R D and advertising and marketing. Placing reliance on the various decisions of the Tribunal, including decision of ITAT Mumbai in the case of Telecordia Technologies Pvt. Ltd. (supra), ld. Counsel submitted that Tata Elxsi is engaged in development of nich ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. DR has not disputed the fact that Tata Elxsi, having turnover of more than ₹ 200 crore and more than 50 times of the assessee s turnover, also owns several intellectual property rights and intangible assets worth 11.86 crores which are 12% of its total net fixed assets. The DR has also not disputed the fact that the company undertook significant R D leading to development of various intellectual property rights in the field of multimedia networking and semi conductors etc. In this situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 and rival contentions, at the outset, we note that ITAT, Mumbai in the case of Telcordia Technologies (supra) has held that if a company has employed heavy capital in development of product, then profitability in the sale of product would be entirely from the company who is involved in service sector only. The relevant operative part of this decision reads thus:- Looking to the fact that it has developed a software product named as Muulam which is used for civil engine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems 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 assessee company is only a service provider company as regards its captive contract software development service segment and assessee company is not incurring notable amount on R D and ad-marketing and also not having any intangible assets and, hence, on the basis of foregoing discussion, we reach to a conclusion that the TPO was not justified in including these seven companies in the final set of comparables and all these companies deserve to be excluded from the final se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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