TMI Blog2016 (10) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... m of bad debts as regular business expenditure and to exclude other income including interest, amount written off and miscellaneous income being non-operative income so as to arrive at the correct operating profit. From going through the order of ld. Assessing Officer u/s 143(3) r.w.s. 144(C) of the Act we observe that no such effect has been to the above said observations of ld. DRP. Further in lieu of our decision for not considering Thirdware Solution Ltd. as a comparable to arrive at the arms length price of the international transaction entered into by the assessee. We are, therefore, of the view that the order u/s 143(3) r.w.s. 144(C) of the Act needs to be set aside and we direct ld. Assessing Officer to frame a fresh order u/s 143(3) r.w.s. 144(C) of the Act after giving due effect to our observations made by us in the preceding paragraphs. Needless to mention that proper opportunity of being heard should be given to the assessee. Accordingly this ground of the assessee is allowed for statistical purposes. - ITA(TP) No. 222/Ahd/2015 - - - Dated:- 27-10-2016 - S. S. Godara (Judicial Member) And Manish Borad (Accountant Member) For the Appellant : Prakash Kotadia, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s solitary grievance is with regard to the order of ld. DRP approving selection of TPO of Thirdware Solutions inspite of the fact that it is functionally different and actually a trader in software. Ld. DRP rejected assessee s objection for selection of Thirdware Solutions as comparable by TPO by observing as below :- 9. As regards Thirdware Solution the TPO considered assessee s objections in detail as under :- VI.1 The assessee submitted that the company is engaged in trading of software and development of software. In order to examine the contention, the relevant portion of the profit and loss account is examined as below : Schedule 12 : Sales Export from SEZ Units 475,540,447 478,572,420 Export from STPI Unit 112,090,633 162,900,630 Revenue from subscription 15,313,736 16,433,714 Sale of licence 15,138,618 23,237,588 Software Services 57,223,072 80,177 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development services and not trading, as claimed by the assessee. Consequently, the objection raised by the assessee is rejected. 9.2 It can be seen that the TPO had considered all the relevant aspects and the TPO s conclusion is based on the facts. Hence we reject assessee s objection on this account. 7. In support of the ground ld. AR submitted as below :- The contentions of the Appellant to prove that Thirdware Solutions Ltd ('Thirdware Solutions') is functionally not comparable to the Appellant are as follows: 1.0 Thirdware Solutions has outsourced substantial portion of work to third party and thus, it operates in a different business model as compared to the Appellant. 1.1. On perusal of the Financial of Thirdware Solutions for FY 2009-10 (enclosed herewith marked as Annexure-B) (Page No 8 to 67 of the paper book), it can be observed that Thirdware Solutions has incurred expense of ₹ 11.42 crores towards outsourcing charges, which is approx 27% of its total direct cost for FY 2009-10 as tabulated below: Particulars Amount (Rs) Outsourcing Charges (Software Service charges) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would appreciate that the above decision of the Hon'ble Delhi Tribunal for AY 2010-11 for software development service provider assessee would be squarely applicable to the facts of the present case. Thus, Thirdware Solutions should be rejected from the comparables, which is outsourcing its substantial activities to third parties and thus, operates in a different business model as compared to the Appellant. 2.0 Other Legal Decisions relied on by the Appellant, which have upheld exclusion of Thirdware Solutions from the list of software development comparables: The Appellant would also like to rely on the following judicial decisions which have held that Thirdware Solutions is not a good comparable for software development service provider assessee. 8. Ld. AR referred and relied on the decisions of the Co-ordinate Bench in the following cases :- 1. Sun Life India Service Centre Pvt. Ltd. vs. DCIT (ITA No.5799(Del)2012) for Asst. Year 2008-09 2. Sun Life India Service Centre Pvt. Ltd. vs. DCIT (ITA No.1489/Del/2014) for AY 2009-10 3. Avaya India (P) Ltd. vs. Addl.CIT in ITA No.5528/Del/2011 4. DCIT vs. Approva Systems Pvt. Ltd. in ITA No.1788/PN/2013 wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule 12, which comprises of 'Sale of licence' amounting to ₹ 39.16 lac, 'Software services' amounting to ₹ 7.67 crore, 'Export from SEZ unit' amounting to ₹ 26,39 crore, 'Export from STPI unit' amounting to ₹ 16.88 crore and 'Revenue from subscription' amounting to ₹ 92.93 lac. These figures indicate that apart from the revenue from 'Software services' which is only to the tune of ₹ 7.67 crore, this company earned total gross revenue from 'Sales' to the tune of ₹ 52,27 crore including from export from SEZ/STPI units. When we consider the figures of this company on an entity level as have been adopted by the TPO for comparison, it becomes vivid that it ceases to be comparable with the assessee's 'Software development and maintenance support services' segment. The reason hardly needs any highlighting, being the income of this company also largely including, revenues from exports from SEZ/STPI units apart from sale of licence. These distinguishing features make this company as non comparable. We, therefore, order for the removal of this company from the list of comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble DRP order(Page No 323 to 341 of the paper book), wherein the Hon'ble DRP has directed to exclude E-lnfochips Bangalore Limited since it is functionally not comparable to the Appellant. The relevant extract of the DRP order is reproduced below for your Honours' ready reference: 7.2 We have considered the tacts of the case, H is an admitted fact that this company is engaged in chip designing - an activity which is entirely different from assesee's, in whose case the product conceptualization and design functions are carried out by the AE - (para 7.2.1 of the TP study), ft is also seen that many of the assesee's cornparabies were rejected by the TPO as being functionally different in similar facts such as Crescenda, Praneel Corporate, Royal Soft etc, hence the TPO is directed to delete this comparable, The order of the Hon'ble DRP is enclosed herewith marked as Annexure-E (Page No 323 to 341 of the paper book). However, the learned AO has erroneously included E-lnfochips Bangalore Limited and thus erred in determining ALP by including E-lnfochips Bangalore Limited as comparable. In view of the above, the Appellant humbly requests your H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat M/s E-Infochips Bangalore Ltd. which was comparable taken by TPO was directed to be deleted by ld. DRP. Also in the case of Kuliza Technologies the comparable selected by TPO, ld.DRP observed that the operating profit margin of Kuliza Technologies needs to be given effect after treating the claim of bad debts as regular business expenditure and to exclude other income including interest, amount written off and miscellaneous income being non-operative income so as to arrive at the correct operating profit. 19. From going through the order of ld. Assessing Officer u/s 143(3) r.w.s. 144(C) of the Act we observe that no such effect has been to the above said observations of ld. DRP. Further in lieu of our decision for not considering Thirdware Solution Ltd. as a comparable to arrive at the arms length price of the international transaction entered into by the assessee. We are, therefore, of the view that the order u/s 143(3) r.w.s. 144(C) of the Act needs to be set aside and we direct ld. Assessing Officer to frame a fresh order u/s 143(3) r.w.s. 144(C) of the Act after giving due effect to our observations made by us in the preceding paragraphs. Needless to mention that proper ..... X X X X Extracts X X X X X X X X Extracts X X X X
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