TMI Blog2017 (1) TMI 1653X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent to the order of DRP inter alia on the following grounds:- Based on the facts and circumstances of the case and in law, STMicroelectronics Private Limited (hereinafter referred to as 'Appellant') respectfully craves leave to prefer an appeal against the order passed by Deputy Commissioner of Income-tax -11(3) ('AO') in pursuance of the directions issued by Dispute Resolution Panel ('DRP'), Bangalore dated 16 August 2011 under section 144C of the Income-tax Act, 1961 ('Act') on the following grounds: That on the facts and circumstances of the case and in law, 1. the order of the learned AO, based on directions of the Hon'ble DRP, erred in assessing the total income at ₹ 4,11,78,787 as against returned income of ₹ 9,38,770/- computed by the Appellant; Grounds of appeal relating to corporate tax matters 2. on the facts and in the circumstances of the case and in law, based on directions of DRP, the learned AO has erred in law by holding that the communication expenses (i.e. internet charges) attributable to the delivery of computer software outside India should be reduced from export turnover while computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the industry behavior (e.g. companies which showed a diminishing revenue trend); b) the learned AO/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis on the ground that the comparables were having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months); c) the learned AO/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis using 'onsite revenues greater than 75% of the export revenues' as a comparability criterion; and d) the learned AO/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis using 'employee cost greater than 25% of the total revenues' as a comparability criterion. 11.the learned AO/TPO erred in by accepting/rejecting certain companies using unreasonable comparability criteria; 12.the learned AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the Appellant vis-a-vis the comparables, while conducting comparability analysis; 13.the learned AO/TPO erred in wrongly computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Packard (India) Global Soft Pvt. Ltd. v. DCIT in IT(TP)A No.1031/Bang/ 2011. The ld. counsel for the assessee further contended that the impugned issue may be decided in the light of the order of the Tribunal in the case of Hewlett Packard (India) Global Soft Pvt. Ltd. (supra). 6. The ld. DR, on the other hand, has placed reliance upon the order of the TPO. 7. Having carefully examined the order of lower authorities in the light of the rival submissions and the synopsis of the arguments and the chart detailing the profile and the reasons for rejection of the comparables, we find that the assessee company, Genesis Microchip (India) Pvt. Ltd. (now merged with ST Microelectronics (P) Ltd)., is engaged in providing software development services and coding of embedded software to its Associated Enterprise (AE), Genesis Microchip Inc. US. During the impugned financial year i.e., 2006-07, assessee has entered into following transactions with its AE:- International Transactions Value (INR) Provision of software development services 47,00,02,366 Reimbursement of employee cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that these comparables are functionally different and some of the comparables had abnormal margin fluctuation and the Tribunal finally directed the AO/TPO to take the following comparables for computing the ALP:- 1. Datamatics Ltd. 2. Geometric Software Ltd. (Seg.) 3. iGate Global Solutions Ltd. (Seg.) 4. LGS Global Ltd. (Lanco Global Solutions Ltd.) 5. Mediasoft Solutions Pvt. Ltd. 6. Mindtree Consulting Ltd. 7. Quintegra Solutions Ltd. 8. R S Software (India) Ltd. 9. Sasken Communications Ltd. (Seg.) 10. SIP Technologies Exports Ltd. 12. Copy of the order of the Tribunal in the case of Hewlett Packard (India) Global Soft Pvt. Ltd. v. DCIT (supra) is placed on record and the relevant observations of the Tribunal in that case for rejection of these comparables are extracted hereunder for the sake of reference:- 23. We have perused the orders and heard the rival contentions. In so far as Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd,, Helios Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. 20. Respectfully following the decision of the Tribunal in similar set of facts, these comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. iii) Celestial Labs Ltd. 42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logy area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R D activities to develop new candidates drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh. According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO s order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 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 comparables 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 IQ Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee s segment of IT-Services. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately ₹ 200 Crores. (iv) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact would be clear from the fact that the very same 26 companies were chosen as comparable in the case of the Assessee as well as in the case of First Advantage Offshore Services Pvt.Ltd.(supra). The following were the relevant observations in the case of First Advantage Offshore Services Pvt.Ltd.(supra): 22. The learned counsel for the assessee submitted that these two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. x) Persistent Systems Ltd. 17.1.1 This company was selected by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. xi) Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14.4.2 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 below :- . Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. xiv) Wipro Limited 13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 24. No doubt if we follow the above decision M/s. Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd,, Helios Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg) have to be excluded from the list of comparables. However out of these, M/s. Accel Transmatics Ltd. (seg), Quintegra Solutions Ltd and Tata Elxsi Ltd (seg) were a part of assessee s own TP study. Hon ble Punjab Haryana High Court in CIT v. Quark Systems India (P) Ltd (supra), upheld the Special Bench decision in DCIT v. Quark Systems (P) Ltd [(2010) 42 DTR 414], noting that latter had only remitted the issue of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO s filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a). Accordingly we hold that Megasoft Ltd can be considered as a good comparable after segmentation as directed in the above order is done. 26. Now taking up the question of exclusion of Flextronics Software Systems Ltd (seg), it is true that the decision of Motorola Solutions (India) P. Ltd (supra) also was for the very same year and also on software development services sector. This Tribunal held as under : 97.2 For a company to be included in the list of comparables, it is necessary that credible information is available about the company. Unless this basic requirement is fulfilled, the company cannot be taken as a comparable. It is true that ld. TPO is entitled to obtain information us/ 133(6), the object of which is primarily only to supplement the information already available on record, but not, as rightly submitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in ITA No. 5637/D/2011 149 agreement with ld. counsel for the assessee that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in the case of Sandstone Capital Advisors Private Limited v. ACJT in ITA No.6315/Mum! 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule IOB(4) and an another case of Pune Bench of the Tribunal in Honeywell Automation India Ltd., has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. The Id. DR contended that since the case of CMC Limited has a different financial year ending vis-a-vis that of the assessee, the same ought to have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by the Id. DR in this regard was not seriously challenged by the Id. AR. Respectfully following the precedent, we hold that this case should be excluded from the list of comparables. 30. No doubt the above decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the rival submissions and have perused the record of the case. 111. Ld. TPO has completely ignored the extraordinary business circumstances pointed out by assessee for which necessary adjustment was required to be made in accordance with Rule 10B(3) of Income Tax Rules. However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables. If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee s own study, then the AO / TPO has to be given a chance for verification, in view of judgment of Hon ble Pun jab Haryana High Court in the case of Quark Systems India P. Ltd (supra). Accordingly we remi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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