TMI Blog2015 (12) TMI 1675X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER PER SMT. P. MADHAVI DEVI, J.M. This is assessee s appeal for the A.Y. 2008-09. This appeal is against the assessment order passed under section 143(3) read with section 144C of the I.T. Act. The assessee has raised as many as six grounds of appeal and also raised an additional ground of appeal. 2. Ground Nos. 1, 5 and 6 are general in nature and therefore need no adjudication. Ground No.2 is against the T.P. adjustment made by the A.O. in accordance with the T.P. order as well as the directions of the DRP. Ground No.3 is against the exclusion of internet expenses from the export turnover treating it as incurred for delivery of software outside India for the purpose of computation of deduction under section 10A of the Act. Ground No.4 is against the levy of interest under section 234B of the I.T. Act. 3. As regards ground No.3 is concerned, we find that though the Ld. Counsel for the assessee has argued on merits of the exclusion of these expenses from the export turnover for the computation of deduction under section 10A of the Act, we are inclined to accept the alternative contention of the assessee that if this expenditure is excluded from the export turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n companies be excluded from the list of comparables and confirmed the T.P. order with regard to other comparables. In accordance with the same, the final assessment order was passed, against which, the assessee is in appeal before us. 5.1. We find that the financial results of the tax payer for the financial year 2007-08 are as under : Description Amount Operating Revenue Rs.27,04,69,149 Operating Cost* Rs.25,09,22,379 Operating Profit (PBIT) ₹ 1,95,46,770 Operating Profit to Cost Ratio 7.23% *Excluding financial charges. 5.2. The assessee has entered into the international transaction for a sum of ₹ 25,72,53,573. The assessee after adopting various filters has arrived at - 16 companies as comparables and by adopting TNMM as the most appropriate method, he arrived at the average margin of the comparables at 11.3%. Since the assessee s margin of 16.95% on operating cost was within + or 5% of the average margin of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100.00 0.00 0.00 0.10 42.28 9. LGS Global Ltd., 136.52 26.64 0.00 100.00 46.80 0.00 0.00 89.80 10. Mindtree Ltd., (seg.) 579.01 17.51 0.03 93.00 26.97 0.00 0.91 66.79 11. Persistent Systems Ltd., 405.49 27.23 3.70 93.93 5.55 0.00 0.08 73.43 12. Quintegra Solution Ltd., 89.87 21.74 0.00 96.80 25.79 0.00 0.50 68.57 13. R Systems International (seg.) 144.56 15.30 6.85 91.80 15.18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KALS Information Systems 5. Wipro Ltd., 6. Tata Elxsi Ltd., 7. Thirdware Solutions Ltd., 8. Persistent Systems Ltd., 9. Quintegra Solutions Ltd., 10. Softsol Limited 11. Bodhtree Consulting Ltd., 5.4. As far as these companies are concerned, the Ld. Counsel for the assessee submitted that these companies are functionally different from the assessee as they were also into software products development and as regards some of the companies, the segmental data also is not available. He submitted that the companies, Infosys Technologies Ltd., and Wipro Limited are both engaged in software development and product development and also own intellectual property in the form of patents and have high turnover and brand value and therefore, are not comparable to the assessee. As regards Softsol India Ltd., is concerned, he submitted that this company is functionally different and also RPT filter. As regards Bod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated in the chart submitted. It was the submission by Ld. Counsel that these comparables were analysed by various Coordinate Benches particularly in the case of M/s. 3DPLM Software Solutions Ltd. vs. DCIT ITA.No.1303/Bang/2012, Agnity India Technologies P. Ltd., vs. DCIT ITA.No.6485/Del/2012, Nethawk Networks India P. Ltd., vs. ITO ITA.No.7633/M/2012 and IBM India P. Ltd., vs. JCIT ITA.No.1543/Bang/2012. 10. Ld. D.R. however, objected to the above and filed written submissions stating that the functional difference highlighted by assessee are less effected as the analysis done in the TNMM and assessee itself is not following the high end and low end distinction while selecting the comparables. Since neither the tax-payer nor the TPO has gone into the verticals within the software industry in its comparable study, the objections of assessee cannot be considered. Likewise, the Ld. D.R. objected for excluding the abnormal high margin companies, high turnover companies and relied on various case law in favour of Revenue. 11. After considering the rival contentions, we are of the opinion that the above companies (except Bodhtree Consulting Ltd.,) are to be excluded as these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's own case for Assessment Year 2007-08 in ITA.No.845/Bang/2011 dt.22.2.2013, and in the case of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 2. Bothtree consulting ltd. 21. On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too. 22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc., to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to exclude the same from the list of final comparables for working out the arithmetic mean. 3. E-Zest Solutions Ltd. 14.4. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparabales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly. 6. Tata Elexsi Ltd. 13.4.1. We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee. 13.4.2. The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/ 2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2. Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in Outsourced Software Product Development Services for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies. (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : Quintegra h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3. Respectfully following the decision of the coordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 19. Softsol India Ltd. 19.1. This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable on the grounds that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that as per the company s reply to the notice under section 133(6) of the Act, the company has categorized itself as a pure software developer and therefore included this company as a comparable as the assessee was also a provider of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not correct as the employee cost details were categorised as cost of services and the sub-heads under the cost of services and if they are taken into consideration, the employee cost would be 78.02% and therefore, it would satisfy the employee cost filter. He has submitted that the Tribunal in the case of Cisco Systems India P. ltd., (supra), has taken this filter into consideration and had given a direction to the TPO to reconsider the inclusion of the same in the final list of comparables. Similarly, in the case of SIP Technologies Ltd., the Ld. Counsel for the assessee submitted that the TPO rejected this company on the ground that it has abnormal activity and has diminishing revenue. The Ld. Counsel for the assessee referred to the annual report of the SIP Technologies Ltd., to demonstrate that investment in SIPTECH Solutions Ltd., existed during F.Y. 2006-07 and not relevant to A.Y. 2008-2009. He further submitted that the TPO has selected this company as a comparable in the year in which the investment was made and has erroneously rejected the same in the subsequent year by changing his stand. He submitted that the company was having margin of 13.90% as in the A.Y. 2007-08 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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