TMI Blog2017 (11) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... records are: The assessee company is engaged in the business of designing and developing softwares. The assessee is also providing support services through Call Centre. The assessee is providing Information Technology Services (ITS) and Information Technology Enabled Services (ITES) to its holding company M/s. Parametric Technology Corporation (PTC USA). Thus, the assessee is a captive service provider. During the period relevant to the assessment year under appeal, the assessee had entered into following international transactions with its Associated Enterprises (AEs) : i. Provision of IT Services Rs.1,15,17,54,575/-. ii. Provision of IT Enabled Services Rs.8,14,01,681/-. 2.1 The assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method to benchmark its Arm s Length Price (ALP) with AE. In respect of ITS the assessee selected 16 companies as comparables and computed average arithmetic mean (OP/TC) of the comparable companies at 11.66% as against assessee s PLI of 16.42%. The Transfer Pricing Officer (TPO) accepted TNMM applied by assessee as the most appropriate m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Global Ltd. 23.30% 4 Crossdomain Solutions Ltd. 27.59% 5 E4e Healthcare Solutions Ltd. 19.38% 6 Maple eSolutions Ltd. 20.67% 7 Triton Corp Ltd. 25.26% Arithmetic Mean 30.10% 2.3 As against assessee s PLI of ITES segment at 18.21%, the arithmetic mean (OP/TC) of comparables finally selected by TPO is 30.10%. The assessee had computed PLI of comparables at 14.91%. Consequent to computation of fresh PLI of comparables, the TPO made adjustment of ₹ 1,05,65,617/- in respect of international transactions relating to ITES segment. 2.4 The assessee in appeal has primarily assailed exclusion of following companies as comparables in ITS segment : i. Kals Information Systems Ltd; ii. FCS Software Solution Ltd; and iii. Helios Matheson Information Technology Ltd. 2.5 In respect of ITES segment, the assessee has prayed for exclusion of: i. Accentia Technologies Ltd.; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards computing the arm s length price of the appellant s international transactions pertaining to provision of IT and ITES services. 8. The ld. AO, while computing the demand has erroneously computed the interest liability under Section 234B of the Act. 4. For the sake of convenience and clarity first the issues raised by the assessee in ITS segment are taken up for adjudication followed by the issues raised in ITES segment. ITS Segment 5. The ld. Counsel for the assessee submitted that the TPO as well as DRP has erred in including Kals Information Systems Ltd. in the final set of comparables. The ld. Counsel submitted that in the immediate preceding assessment year i.e. assessment year 2007-08 and in the immediate succeeding assessment year i.e. assessment year 2009-10 Kals Information Systems Ltd. was excluded from the list of comparables in assessee s own case. There has been no change in facts and circumstances in the assessment year under appeal. Therefore, the same should be excluded in the assessment year under appeal as well. The ld. Counsel further submitted that the assessee company is engaged in software development and is not developing and selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance services. The ld. Counsel referred to financial statement of company at page 664 of the paper book to show that the said company has not provided services category-wise segmental data. The ld. Counsel further contended that the TPO has applied filter of 75% for rejecting the comparables having income from software development services. Even if E-learning and Digital Consulting are considered as software development activities of FCS Software Solutions Ltd., the remaining activities of FCS Software Solutions Ltd. which are in the nature of ITES activities constitutes 26% to total revenue. Thus, the revenue of FCS Software Solutions Ltd. from ITES is 74% i.e. below the filter set by TPO. The TPO has cherry picked the companies for including the same in final list of comparables by violating its own set of filters. 10. The ld. Counsel submitted that the Tribunal in the case of TIBCO Software India Pvt. Ltd. Vs. Dy. Commissioner of Income Tax in ITA No. 2536/PN/2012 for assessment year 2008-09 decided on 11-02-2015 has held that FCS Software Solutions Ltd. is not a good comparable. The ld. Counsel submitted that the assessee and TIBCO Software India Pvt. Ltd. are involved in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n support services and infrastructure management services, which constitute 11% and 15% respectively of the total revenue, are in the nature of IT enabled services and not linked to the software development services. On this basis, it was sought to be pointed out that if the aforesaid income streams are excluded from the segment of software development services, then the income from software development services segment falls below 75% of the total income. The TPO had applied a filter to exclude such concerns from the list of comparables, wherein the income from software development services was less than 75% of the total income. In fact, in the discussion made by the TPO in response to assessee s aforesaid assertions, there is no denial to the same. Though the TPO goes on to rely on the CBDT s Circular dated 26.09.2000 (supra), but that is in relation to the activity of E-learning and Digital Consulting being carried out by the assessee. The segment of E-learning and Digital Consulting is a different segment. In any case, assessee s plea based on the nature of services on account of application support services segment and infrastructure management services segment have not been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables is based on twin grounds. Firstly, it is contended that the said concern has declared an abnormally high profit margin of 57.02% for the financial year under consideration; and, secondly, that the margins of the said concern widely fluctuate in over the years. In the context of the exclusion of abnormal profit making concerns, the following discussion made by the Special Bench of the Tribunal in the case of Maersk Global Centrea (India) Pvt. Ltd. (supra) is worthy of notice : In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of software development expenditure to total income has fallen drastically from 72.75% to 35.10%, which shows that the current year has witnessed abnormal events. All the aforesaid factual aspects of the matter have not been disputed by the Revenue before us. From the aforesaid analysis, it is clear that the operating margins of the said concern do not reflect a consistent trend over the years, and in any case, the current year s operations in comparison to the earlier years are quite abnormal. Considering the entirety of circumstances, in our view, the financial results declared by the said concern do not reflect a normal business trend and therefore in our view the said concern is liable to be excluded from the final set of comparables. We hold so. The ld. DR has not controverted the decisions of Co-ordinate Bench in rejecting FCS Software Solutions Ltd. from the final list of comparables. Thus, in view of the facts of the case and the decisions discussed above we find that FCS Software Solutions Ltd. is not a good comparables and hence, is liable to be excluded from final set of comparables. We hold and direct, accordingly. 14. As regards the objection raised by ld. DR t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer/TPO to exclude Helios Matheson Information Technology Ltd. from the final set of comparables. 18. The ld. Counsel submitted that if the aforesaid three companies i.e. Kals Information Systems Ltd., FCS Software Solution Ltd. and Helios Matheson Information Technology Ltd. are excluded from the final set of comparables the arithmetic mean of the comparables would fall within 5% range, therefore, no TP adjustment would be required. The ld. Counsel furnished a chart indicating that it the three companies discussed above are excluded, the PLI of comparables would be 22.01%. In view of the prayer made by the ld. Counsel for the assessee, we restrict our findings with respect to exclusion of aforesaid three companies from the final set of comparables only. ITES Segment 19. The ld. Counsel for the assessee submitted that Coral Hubs Ltd. (formerly known as Vishal Information Technologies Ltd.) should be excluded from the list of comparables in respect of ITES services as the activities of the said companies are at variance as compared to the activities of the assessee companies. Coral Hubs Ltd. is engaged in data conversion, e-publishing, custom application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial results for comparative analysis. The Co-ordinate Bench of the Tribunal in assessee s own case in ITA No. 1605/PN/2011 for assessment year 2007-08 has excluded Coral Hubs Ltd. form the final list of comparables by observing as under : 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. The Hon ble Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accentia Technologies Ltd. from the list of comparables by observing as under : 47. The next objection of the learned Authorized Representative for the assessee was with regard to the inclusion of M/s. Accentia Technologies Ltd. which admittedly was engaged in developing its own software products and was rendering medical transcription services. Further, the said company during the year under consideration had made certain acquisitions which in turn affected the margins of the year of the acquisition. We find that Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Pvt. Ltd. (supra) had rejected Accentia Technologies Ltd. for having extra-ordinary circumstances i.e. amalgamation. Following the parity of reasoning as adopted by the Hyderabad Bench of the Tribunal, we hold that the said company had different functional profile as compared to the assessee, which in turn explained the abnormally high profit margins earned by the said company as compared to the assessee. Accordingly, we accept the plea of the assessee and hold that the said company is not to be used as comparable in ITES segments of the assessee. 27. Further, on perusal of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des heard. We find that the TPO has excluded Aditya Birla Minacs Worldwide Ltd. from the list of comparables for the reason that the said company has suffered losses in Financial Year 2007-08. A company, if functionally comparable, should not be excluded from the list of comparables merely on the ground that it has suffered losses in a particular financial year, unless it is a consistent loss making company. Further, the ld. Counsel has pointed that alleged loss suffered by Aditya Birla Minacs Worldwide Ltd. on account of foreign exchange fluctuation is not in the nature of operating loss. The Co-ordinate Bench of the Tribunal in the case of TIBCO Software India Pvt. Ltd. Vs. Dy. Commissioner of Income Tax (supra) while dealing with somewhat similar issue has held as under : 29. We have carefully considered the rival submissions. In our considered opinion, the point sought to be made out by the TPO is quite mis-placed having regard to the purpose and import of the comparability analysis of the international transaction being undertaken for determining its arm's length price. Ostensibly, the whole objective of the transfer pricing proceeding is that the contours of an un-co ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
