TMI Blog2018 (5) TMI 1536X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to assessment year 2012-13 respectively. 2. The issue that arises for consideration in this appeal is with regard to the correctness of determination of Arm s Length Price in respect of international transaction of rendering of Software Development Services and Information Technology Enabled Services by the Assessee to its Associated Enterprise(A.E). The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) to its AE. The transaction of rendering software development services to its AE was an international transaction. As per the provisions of Sec.92 of the Act, income from international transaction has to be computed having regard to Arm s Length Price (ALP). 3. The details of the international transaction between the Assessee and its AE in AY 2012-13 was as follows: Particulars Amount in Rs. Provision of SWD services 357,68,61,693/- Provision of ITeS 104,03,22,271/- 4. In this appeal, we are concerned only with the International transaction of providing SWD Services by the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction of rendering of SWD services by the Assessee to its holding company as follows: Computation of arm s length price by the TPO and the adjustment made: Arm s Length Mean Margin 20.90% Less: Working Capital Adjustment 0.33% Adjusted mean margin of the comparables 20.57% Operating Cost ₹ 14,60,40,932/- Arm s Length Price (ALP) 121.71% of Operating Cost ₹ 17,60,81,552/- Price Received ₹ 16,51,55,972/- Variation in Price 3% of Price received 1,09,25,580/- 49,54,679/- Short fall being adjustment u/S. 92CA ₹ 1,09,25,580/- 6. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., ₹ 1,09,25,580/- was added to the total income by the AO in his drat assessment order dated 5.12.2016 as addition on account of shortfall being adjustment u/s.92CA of the Act. 7. The Assessee filed objections to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined by any of the several methods, specified therein, having regard to the nature of the transaction or class of transaction or class of associated person or functions performed by such persons or such other relevant factors as the Central Board of Direct Taxes (hereinafter referred to as Board ) may prescribe. Rule 10B(1) of the Income Tax Rules, 1962 (Rules) provides that for the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the methods, being the most appropriate method(MAM) prescribed therein. TNMM is the MAM in the present case. Rule 10B(1) (e) of the rules lays down the following criteria for comparison viz., ( i ) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; ( ii ) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curate adjustments can be made to eliminate the material effects of such differences. Keeping in mind the above legal provisions, we will now deal with the plea of the Assessee for exclusion of three of the comparable companies selected by the TPO viz., (i) CG VAK Software Exports Ltd., (ii) Larsen Toubro Infotech Ltd., (iii) Persistent Systems Ltd. and for inclusion of two companies viz., (i) Cigniti Tech Ltd. and (ii) Helios Mathesons Ltd., in the list of comparable companies. 9. CG VAK Software Exports Ltd. : The following are the arguments of the Assessee for excluding this company from the list of comparable companies viz., (i) This company owns intangibles which constitutes about 5.60% of its total revenue whereas the Assessee does not own any intangibles. (ii) This company provides array of services such as SWD services, Software Products and BPO services whereas the Assessee is engaged only in providing SWD Services. This company also does Research Development activities whereas the Assessee does not do any such activity. (iii) The segmental details of the various segments of this company are not available in the public domain and only geographical segment de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which would simplify and standardize the process of Software Development. We are of the view that this objection of the Assessee is therefore cannot be the basis to hold that this company is functionally not comparable with the Assessee. 13. Regarding non availability of segmental results, the TPO has brought on record material to show that the segmental details of the two segments viz., SWD services and BPO are available in the Annual Report and that BPO segment is only 1.6% of the total revenue from both the aforesaid segments. The other argument of the Assessee that the TPO has himself rejected this company as a comparable company in Assessee s case for earlier AY is not substantiated with any supporting document. In these circumstances, we are of the view that this company has to be retained as comparable company. 14. Larsen Toubro Infotech Ltd . As far as this company is concerned, this company also renders SWD services. In page-15 of the TPO s order, the functional similarity of this company with that of the Assessee has been tabulated by the TPO. The objections of the Assessee for rejecting such objections has been set out at page-21 to 23 of the TPO s order. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarded by the revenue authorities. 19. As far as the objections regarding presence of intangibles, it is seen from the order of the TPO that the intangibles are nothing but Operating systems, office tools, development tools, testing tools etc., that are used in the process of rendering SWD services by the Assessee and therefore cannot be the basis to hold that this company is functionally not comparable with the Assessee. As far as the objection regarding presence of brand value is concerned, it has been held by the TPO that there is no intangible in the form of brand owned by this company. The scale of operations of this company cannot be the basis to hold that this company is not comparable when functionally it is found to be comparable. 20. None of the objections raised by the Assessee meet the criteria for excluding this company in terms of comparability criteria laid down in Rule 10B(2) of the Rules. We therefore uphold the inclusion of this company in the list of comparable companies. 21. Persistent Systems Ltd. : The objection of the Assessee for excluding this company from the list of comparable companies is on the ground that this company is also engaged in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee that software testing is an integral part of software development cycle. This contention of the Assessee is not correct. The question therefore would be as to whether software testing services would be equivalent to software development services. Software testing is only part of software development life cycle. It cannot be equated with software development services. The TPO in our view rightly excluded this company for comparability purposes. The learned DR also brought to our notice a decision of the ITAT Bangalore Bench rendered in the case of Triology EBusiness Software Ltd. Vs. DCIT (2013) 29 Taxmann.com 310(Bang-Trib) wherein identical view has been taken on an identical issue. We therefore uphold exclusion of this company as a comparable company. 23. Helios and Matheson Information Technology Ltd.: - The Revenue authorities excluded this company from the list of comparable companies for the reason that the financial results of this company available are for difference accounting year. The plea of the learned AR is that if the financials of this company is available for the relevant accounting year then the same should be considered by the TPO. The learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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