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TMI Blog2019 (8) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... solely to BMC group entities. Return was filed declaring total income of Rs. 49,30,810/-. The assessee filed Form No. 3CEB declaring four international transactions including the three stated above, in addition to Reimbursement of expenses. The AO referred the matter of determination of the Arm's Length Price (ALP) of the international transactions to the Transfer Pricing Officer (TPO). The TPO accepted the international transactions of Reimbursement of expenses and Rendering of ITES at ALP. Instantly, we are dealing with the international transaction of "Rendering of Software Development services" with transacted value of Rs. 1,78,27,24,996/- which was separately processed by the assessee under the Transactional Net Margin Method (TNMM) with Profit Level Indicator of Operating profits to Total cost (OP/TC). The assessee selected eight companies as comparable. The assessee worked out its own PLI at 10.76% as against that of comparables at average of 13.59% to show that the transaction was at ALP. The TPO made certain inclusions in or exclusions from the assessee's list of comparables and finalized his own set of comparables comprising of nine companies with adjusted average OP/TC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as well as its Associated Enterprises are engaged in Research and development; Conceptualization & design; Functional specification/requirement analysis; Coding, documentation, testing; Quality control; Modification of existing products; and Customer Support. Conceptualization of the required Software products is performed by BMC overseas entities and the assessee based on the requirements of the clients and the market. Based on the product conceptualization, the functional specifications and requirement analysis for the software to be developed is jointly undertaken by the assessee and BMC overseas entities. The part relating to Coding and development of the software modules is largely done by the assessee. Since the software are to be developed for the ultimate customers of BMC overseas entities, the assessee also sometimes directly liaises with the customers to understand their exact requirements. 6. We have also gone through the Software Development and Information Technology Enabled Services Agreement (Agreement) dated 01-09-2001 entered into between assessee and BMC Software Inc., USA, which was amended from time to time in the years 2002, 2003 and 2004. A copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, we now proceed to examine the comparability or otherwise of the companies under challenge. (i) Bodhtree Consulting Ltd. : 8.1. The TPO treated Bodhtree Consulting Ltd. as one of the comparables. The assessee objected to its inclusion on the ground of functional dissimilarity, extraordinary financial events and fluctuating profit margins. The TPO rejected the assessee's contention of business restructuring during the year and also held the same to be functionally similar inasmuch as it was having only one identifiable reportable segment of `Software development services'. The assessee is aggrieved by the inclusion of this company in the final list of comparables. 8.2. We find from the Annual report of this company that it: "has only one segment, namely, Software development. Being a software solutions company, which is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies." Thus, it can be seen that this company is providing end-to-end solutions and also consultancy, which is not the case with the assessee company. 8.3. The ld. AR submitted that Bodhtree Consulting Ltd. cannot be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alone, but, the income got recognized on the raising of bills in the current year. 8.5. Under the mercantile system of accounting, income is recognized at the time of its accrual and the expenses become deductible when liability to pay is incurred. The dates of actual payment of expenses or receipt of income become insignificant. This is also called `Matching concept', as per which income is recognized with the incurring of expenses. To put it simply, if income does not accrue from a particular transaction, the expenses incurred for such transaction are excluded from the Trading and Profit & loss account by taking them to Balance sheet. To illustrate, if there is an incomplete contract worth Rs. 100 for doing a particular work, and the assessee has incurred Rs. 60 on this project till the close of the year, but the income is to be recognized only on the completion of the project, an event to take place in the subsequent year, then, the amount of Rs. 60 is not considered as expenditure for the year, but is taken to the Balance sheet as closing work-in-progress, which becomes opening work-in-progress for the subsequent year and the income is finally computed from such project/cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable in the paper book, that its P & L Account shows `Income from software services & Products' as one unit at Rs. 24,02,78,099/-. Schedules 7 gives break up of this income with "Income from Software Services" at Rs. 21.03 crore and "Consultancy Charges" at Rs. 2.16 crore. Segmental information of this company is available on page 36 of its Annual Report, which states that: "The Company is primarily engaged in Software Development and I.T. enabled services which is considered the only reportable business segment". This indicates that the revenues from Software Development and ITES have been clubbed by this company which also includes Consultancy charges. No doubt Consultancy charges in relation to Software Development are part of Software Development, but the inclusion of ITES in the overall segment frustrates the comparability. We are currently dealing with the international transaction of `Provision of Software Development services' and the international transaction of ITES by the assessee is a separate one which has also been benchmarked distinctly. In our considered opinion, e-Infochips Bangalore Ltd., having a pool of both software development and ITES segments into a common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the relevant material on record. A copy of the Annual report of this company has been placed on record. Profit and loss account of the relevant Division of this company has been placed at page 60 of the Annual report, which shows "Income - revenue from operations" at Rs. 2,18,26,36,019/-. The elaboration of such revenue from operations has been given in Schedule l as "Income from software sales and services" at Rs. 2,13,37,41,527/- in addition to Other income and Dividend income. Segmental reporting has been discussed at page 66 of the Annual report to indicate that "The company is operating in a single segment". It, therefore, transpires that the income of this company is not only from software services but also from software sales. This shows that the company is engaged into the business of software products as well. There is hardly any need to state difference between the software product company and a software development company. Whereas a software product company would develop a product and then earn revenue from its sale over a period, a simplicitor software development company would render software development services not leading to creation of any software product in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heet of this company shows `Inventories' at Rs. 85,77,723/-. The above information clearly deciphers that Kals Information Technology Systems Ltd. is not only engaged in providing Software Development Services but is also dealing in Software products under the relevant segment. As the assessee is not engaged in the business of Software products but is rendering only Software services on captive basis, in our considered opinion, this company cannot be considered as comparable. The Hon'ble jurisdictional High Court in CIT vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 0176 (Bom) has held that a Software product company cannot be compared with a company providing software services. As Kals Information Technology Systems Ltd. is engaged in selling of software products which is different from the activities undertaken by assessee, namely, rendering of software service only to its AEs, we hold the same to be incomparable and accordingly direct to exclude it from the final list of comparables. (vi) Maars Software International Ltd.: 13.1. In addition to the assessee seeking exclusion of the above five companies, a prayer has also been made for inclusion of Maars Software International Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ld. DRP. 15. Having heard both the sides and gone through the relevant material on record, we find that similar issue came up for consideration before the Tribunal in assessee's own case for the A.Y. 2006-07. In para 44 of its order, the Tribunal has restored the matter to the file of AO/TPO for computing the risk adjustment after granting reasonable opportunity of hearing to the assessee. In the absence of any distinguishing feature having been brought to our notice by the ld. DR, respectfully following the precedent, we-set aside the impugned order on this score and remit the matter to the file of AO/TPO to follow the directions given by the Tribunal in its order for the A.Y. 2006-07. II. SALES SUPPORT SERVICES SEGMENT 16. The assessee declared an international transaction of "Rendering of sales support services" with transacted value of Rs. 2,47,84,351/- The assessee applied the TNMM as the most appropriate method for its benchmarking. Computing its own OP/TC at 8.84%, the assessee worked out average adjusted margin of comparables at 15.24% to demonstrate that its transaction was at ALP. As against the assessee choosing seven companies as comparables, the TPO expanded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T for the A.Y. 2008-09 (ITA No.2584/PUN/2012 dated 10-02-2017), a copy of which has been placed on record. The ld. AR invited our attention towards para 24 of the later order accepting change in profile of this company in comparison to earlier years and accordingly holding it to be not includible in the list of comparables. It was, therefore, prayed that the changed business profile of TSR Darashaw be considered, which is relevant for the year and it should be removed from the list of comparables following the decision of the co-ordinate bench in the case of Honeywell Turbo Technologies (India) Pvt. Ltd. (supra). The ld. DR did not dispute the position as put forth on behalf of the assessee. 18.3. We have heard both the sides and gone through the relevant material on record. We have also gone through the Annual report of this company for the year under consideration, a copy of which has been placed on record. On perusal of such Annual Report, it emerges that this company on an overview is a broking and investment banking house. Apart from 'Pay Roll and Trust Fund activity (Pay Roll), its other segments are: 'Registrar and Transfer Agent activity (R&D)' and 'Records management acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m export of the eligible products shall be done by considering the same proportion as export turnover in respect of such products bears to the total turnover to the profits of the business of the undertaking. There are three components involved in the computation of eligible profits. Apart from the profits of the business of the undertaking, there is a one component of export turnover and another of total turnover. The term "export turnover" has been defined in Explanation 2(iv) to section 10A as consideration in respect of export of articles or things etc. received or brought into in India but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things etc. outside India incurred in foreign exchange in providing the technical services outside India. The term "total turnover" has not been specifically defined in the definition clause of section 10A contained in Explanation 2. However, it goes without saying that `total turnover' comprises of `export turnover' and domestic turnover. For example, if export turnover is Rs. 100 and domestic turnover is Rs. 80, then total turnover would be Rs. 180 (Rs. 100 + Rs. 80), which is sum t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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