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TMI Blog2019 (4) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... plications being used by the AEs. Also undertakes database cleanup and software maintenance services, supporting applications and platforms within Kaplan businesses, bug fixing and maintenance etc., and Undertaking functional test and other test for various software development activities performed by Kaplan India Private limited (KIPL). Also undertake testing of the work done by the AE." 2.1 The return of income was filed declaring an income of Rs. 28,03,0238/-. The case was selected for scrutiny and during the course of scrutiny assessment proceedings, a reference was made to the Transfer Pricing Officer (TPO) under section 92 CA of the Income Tax Act, 1961 (hereinafter called 'the Act'). The TPO rejected the Transfer Pricing (TP) analysis undertaken by the assessee and made adjustment of Rs. 92,77,646/-. The Assessing Officer (AO) also made certain other additions to the declared income. The Transfer pricing adjustment to software development services segment and disallowance of expenditure incurred towards group medical insurance made by the AO are now being contested in the present appeal by the assessee. The following grounds have been raised: "On the facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egal and bad in law. 8. The learned TPO / AO / CIT(A) have erred in erroneously rejecting the comparable companies selected by the Appellant and adding certain companies to the final set of comparables on an ad-hoc basis, thereby resorting to cherry picking of comparables. 9. The learned TPO I AO / CIT(A) have erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 10. The TPO/AO /CIT (A) has erred by wrongly & illegally treating the depreciation on trade mark and loss on foreign exchange fluctuation as operative cost and ignoring the fact that the adjusted margin of the appellant based on actual OP/OC is 17.64%. The CIT (A) have provided no findings/directions on this ground. 11. The TPO / AO / CIT(A) has erred in law in not applying the Proviso to Section 92C of the Act and have failed to allow the Appellant the benefit of downward variation of 5 percent in determining the Arm's Length Price. 12. The TPO / AO / CIT (A) has erred by disallowing expenses of Rs. 352,305/- claimed under Professional & Technical Sendees by treating it as prior period expenses. 13. The TPO / AO / CIT (A) has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nc. is a group subsidiary of the company and provides high-end customized education training solutions for the institutional and corporate customers in finance, technical product knowledge and consultative selling courses. It was submitted by the Ld. AR that the assessee was compensated on cost plus 10 per cent basis for the international transaction of provision of development, production and maintenance of computer software, support centre and other services. It was submitted that after carrying out the Functions Assets and Risk (FAR) analysis in paragraph 4.2 to 4.4 of the TP study, the international transaction of provisions of software development services were considered to be at Arm's Length Price (ALP) at Para 5.5.4 of the TP study, by comparing it with 32 companies identified by the assessee at Para 5.4.6. The Ld. AR submitted that, although, in the transfer pricing study the method adopted was labelled as Cost Plus Method (CPM), it is a common ground of the assessee and the TPO that Transactional Net Margin Method (TNMM) is the Most Appropriate Method (MAM) and OP/OC is the Profit Level Indicator (PLI). 3.5 The Ld. AR further submitted that vide his order dated 29th Octo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the scheme of insurance issued by ICICI Lombard is approved under section 36(1)(ib). 3.8 Before us, the learned counsel for the assessee mainly sought exclusion of the following companies: (1) Avani Cincom Technologies Limited; (2)Helios & Matheson Limited; (3) Ishir Infotech Limited; (4) Megasoft Limited; (5) Tata Elxsi Limited; and inclusion of following companies: (1) Indium Software (India) Ltd; (2) VMF soft Tech Limited from/to the final set of the 26 comparables chosen by the TPO. 3.9 During the course of hearing, the learned counsel filed a detailed chart containing list of decisions of the coordinate benches of this Tribunal (ITAT) in relation to AY 07-08, wherein the above companies were claimed to have been directed to be excluded or included on similar grounds as in the present case. It was contended by the Ld. AR that as these decisions are in context of the TP adjustment/s made to the Software Development services segment for very same Assessment Year and, therefore, the conclusions reached by the coordinate benches should be followed. 3.10 The Learned counsel also invited our attention to the information claimed to be in public realm by way of Directors' Report t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the coordinate benches have considered issues arising from the very same set of 26 comparables in AY 07-08. In such factual background decisions, excluding or including companies on basis of generic disqualifications like software product revenue being earned in case of certain companies and segmental data not being available or conclusion that a certain company fails identical filter in such decided case, deserve to be followed. Further, provisions of Chapter X of the Act are meant for compliance by the taxpayers and penal consequences get attracted for any non-compliance. Reference to Income Tax Rules 10 B, 10 C and 10 D indicate that such compliance has to be made by considering material available in the public domain. The power vested in authorities to obtain information under 133 (6) of the Act for the purposes of proceedings under the Act, in the context of transfer pricing provisions, require a carefully balanced approach with the above compliance requirement expected from taxpayers. Accordingly, we note that while the information/s obtained by the TPO under section 133(6) of the Act cannot form the sole basis for FAR analysis, as that would make the requirement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 133 (6) information. Having heard both the parties on this comparable, firstly, we notice from the order of the TPO that unlike in cases of Celestia Labs limited at Para 13.4, Megasoft Limited at Para 13.17 and Tata Elxsi Limited at Para 13.25, the TPO has chosen not to provide details of information obtained under section 133 (6). Similar extraction of relied upon portion of the information obtained under section 133 (6) was necessary considering the reasoning given by the TPO himself at Para 13.2 of his order wherein it is expressly noted that even in the absence of financials, inclusion of this company as a comparable was warranted being based on information received under section 133 (6). Further, it is also noticed that objections, similar to ones raised by Ld. Sr. DR in the present case, were raised by the Ld. departmental representative in the case of Motorola Solutions India Pvt. Limited, as discussed at paragraphs 89 and 90 of said order. Relevance of conclusions reached by the coordinate bench in that case cannot be over emphasised. In Motorola, the coordinate bench had concluded that even if one were to accept the argument of the department that no income is shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable. It was submitted that such rectification application was still pending consideration. The Ld. Sr. DR contended that Helios Matheson was rightly included as a comparable company based on FAR analysis and that a 'google' search of this company showed that there is no software product sale revenue. Having heard the rival contentions, it is seen that TPO's order (Para 13.9) shows that this company is included by the TPO by overruling the objection of the assessee without citing any reasons. It is also noticed that the Ld. CIT (A) has also summarily rejected the contention about the failure of the employee cost filter and has upheld the inclusion of this company. It is seen that this company fails the employee cost filter of 25% as Helios Mathesan's employee cost is only 1.07% of sales. We notice that employee cost filter is one of the filters adopted by the TPO himself at Para 8 of his order. The totality of above facts and circumstances as noticed in the above paragraphs clearly shows that FAR and, therefore, the margin earned by Helios Mathesan is totally different in comparison to the FAR of the assessee. It is therefore, directed that Helios Mathesan be excluded from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of this company is from professional receipts. Details of administrative expenditure marked as Schedule 16 to the financial statement include brokerage and commission paid as also professional fees. Employee cost details are shown separately under schedule 15 to the financials. The company recognizes income by application of percentage of completion method unlike cost plus mark-up basis of compensation applicable to captive service providers like the present assessee. Thus, it appears that in addition to this company not qualifying the employee cost filter applied by the TPO, the FAR of Ishirinfotech Limited is different compared to that of Kaplan India Private Limited. Reference to the chart filed by the Ld. AR during the hearing indicates that other coordinate benches, details of which are mentioned in the chart, also concluded that Ishirinfotech Limited is not a valid comparable for AY 2007-08 for software development services segment. Accordingly, respectfully following the decision of the coordinate bench of Bangalore in the case of NXP Semi Conductors India Pvt. Ltd. (supra), we direct exclusion of this company from the final set of comparable companies. 5.4 Megasoft L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude this company from the set of comparable companies unless taxpayer could demonstrate that such amalgamation impacted the margin earned by the company. Ld. Sr. DR further argued that consultancy provided by this company for software product development etc., will have to be considered as part of software development services and absence of segmental information should not lead to exclusion of this company. We have carefully considered the rival contentions, the material available on record and also the decisions of the coordinate benches for the very same year. We are inclined to agree with the submissions of the Ld. Counsel for the assessee as this company is clearly engaged in multifarious activities including sale of software products. Further, the impact of the extraordinary event of amalgamation is also not possible to be quantified and adjusted. We also notice that the TPO himself has accepted that 19% of the revenue earned by this company is from software products. Submissions of the Ld. Sr. DR on this aspect are thus contrary to findings of the TPO. The Ld. CIT (A) has also not given any valid reasons for upholding the conclusions reached by the TPO. Accordingly, respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in TPO's order under Para 13.25 and argued that 87.45 % of revenues for AY 2007-08 was stated to be from software development services and hence Tata Elxsi is comparable to the assessee company. We have considered the rival contentions as also the factual details. We find that these very contentions were considered by the coordinate benches of Tribunal in Motorola and NXP semiconductors at paragraphs pointed out above. Coordinate benches have come to the conclusion that the activities carried out under software development segment by Tata Elxsi are not simply software development services but are complex in nature. The IPR in the form of software researched and developed were used as a tool for further development of software yielding higher margins. It was rightly concluded in such decisions that the segment of software development services in Tata Elxsi includes Design services including hardware design and hence is not comparable to simple software development services. We find that these observations are fully applicable in the facts of present case. Accordingly, respectfully following the decision of the coordinate bench of Bangalore in the case of NXP Semi Conductors Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and Tata Elxsi Ltd. from the final list of comparables. The TPO/AO will also decide afresh the comparability and inclusion or otherwise of Indium Software (India) Limited and VMF Softech after affording an opportunity of being heard as directed above. 5.8 The Ld. Counsel for the assessee contended that the disallowance of group medical insurance expenditure on the ground that the scheme of ICICI Lombard is not recognised is incorrect as the material available in the public domain like Directors report (copy of which was handed over during the hearing) clearly indicated that ICICI Lombard offered schemes which were approved by IRDA. The Ld. Sr. DR contended that no such material was placed before the lower authorities. We have considered rival submissions. It appears that the schemes offered by ICICI Lombard had approval of IRDA on 03.08.2001. In the interests of justice, we direct the AO to consider afresh all the relevant material available in public domain. The assessee is directed to produce the same before the AO, who will decide the issue afresh after affording suitable opportunity of being heard to the Assessee. 6.0 In the final result, the appeal of the assessee is part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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