TMI Blog2019 (2) TMI 1808X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 19/06/2018 passed by the Assistant Commissioner of Income Tax, Circle-18(2), New Delhi [ hereinafter will be referred as the Assessing Officer ] in compliance to the direction dated 16/04/2018 of the Ld. Dispute Resolution Panel (DRP) for assessment year 2014-15. The grounds raised in the appeal are reproduced as under: 1. That on the facts and in the circumstances of the case and in law, the order passed by the Assessing Officer ( AO ) is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference made by the AO suffers from jurisdictional error as the AO did not record any reasons in assessment order based on which he reached the conclusion that it was expedient and necessary to refer the matter to the Transfer Pricing Officer ( TPO ) for computation of the arm's length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ( Act ). 3. That on facts and circumstances of the case and in law, the TPO/AO/ Dispute Resolution Panel ( DRP ) erred in making an addition of INR 42,11,57,036/- to the returned income of the Appellant by re-computing the arm's length price of the international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing software development services to its associated enterprises (AEs). The assessee also provides marketing support services to its associated enterprises. The company operates through its centres at Noida and Bangalore, registered with Software Technology Park of India as 100% export oriented units and Hyderabad, registered with Special Economic Zone. For the services rendered, the assessee is being remunerated on the cost-plus basis by its associated enterprises. 3. For the year under consideration, the assessee filed return of income on 28/11/2004 declaring total income of ₹ 51,39,45, 910/-. The case was selected for scrutiny and the statutory notices under the Income Tax Act, 1961 (in short the Act) were issued and complied with. In view of the International Transactions carried out by the assessee with its Associated Enterprises. The Ld. Assessing Officer referred the matter of determination of arm s length price of those international transactions to the Ld. Transfer Pricing Officer (TPO), who after considering submission of the assessee, proposed transfer pricing adjustment as under: Segments Adjustment (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low-end chip designing/software tools and application development and marketing/sales support services to its group companies. During the year the assessee received software development services charges of ₹ 308,51,97,138/- from its Associated Enterprises. The arm s length price of this international transaction of software development services was determined by the assessee by applying Transactional Net Margin Method (TNMM). The Operating Profit to Total Cost (OP/TC) ratio is taken as the Profit Level Indicator (PLI) in the TNMM analysis. The PLI of the software segment was worked out to 10% on cost. The assessee selected 9 comparables and worked out their average PLI at 10.07% as per the updated version. Accordingly, the assessee submitted that the value of the International transaction of the software development services was at arm s length price. 11. The Ld. TPO however, did not accept certain filters for selecting the comparables by the assessee and he rejected 6 comparables of the assessee and accepted balance 3 comparables. The Ld. TPO introduced 5 new comparables making the total comparables to 8. The Ld. TPO worked out the average of adjusted OP/OC of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation of software development service is available. Thus, the software development service segment of assessee cannot be compared with the company at entity level. The Ld. Counsel relied on the decision of the Tribunal Pune Bench in the case of Pubmatic India (P) Ltd. Vs ACIT (2018) 91 taxmann.com 356 (Pune Trib) for rejection of the comparable as no separate segment of provision of software service available. 13.2 On the contrary, the Ld. DR referred to page 31 of TPO s order and submitted that nowhere it is mentioned that the company was engaged in sale of the product and company was basically software development service. The Ld. DR also referred to page 30 of the Annual Report Compilation to support his contention that the company was engaged only in providing software services. He submitted that though the company works in different verticals but main function is of software development only. He submitted that there is no inventory in the balance sheet of software products, which supports the stand of the Revenue that the company was engaged only in software development services. With regard to the decision of the Tribunal in the case of Pubmatic India (P) Ltd. is conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is available in case of manufacturing, BFSI, travel and transportation and others. He further submitted that the company was instrumental in carrying out research and development activity and providing preferred technology solutions to many leading Corporation. The Ld. Counsel submitted that the company cannot be compared with assessee because of presence of high value of intangibles (i.e. INR 17 crores) and brand positioning. The Ld. Counsel submitted that the company has been excluded for having high-value intangibles (patents) and diverse nature of services in the case of Agilis information Technologies India (P) Ltd. versus ACIT (2018) 89 taxmann.com 440 (Delhi-Trib). 13.5 On the other hand, the Ld. DR referred to page 153 of the Annual Report compendium and submitted that para 3.9 has clearly mentioned that the company is engaged in software development services. Further he referred to page 154 of the annual report compendium and submitted that the segments of manufacturing, BSFI, travels and transportation and others are different verticals of the software development services function and the functions of product engineering i.e. Hitech segment has been segregated by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable even at the segment level. 3. Persistent Systems Ltd. 13.8 The Ld. Counsel submitted that the company is in software products and software services and the company has also earned revenue from royalty and maintenance contract, which are incorporated in the revenue stream. No segment information is available vis- -vis operation relating to software products, software services and technology innovation. The Ld. Counsel submitted that the company is having intangible worth ₹ 16.28 crores comprising of software license, acquired contractual rights and research and development expenditure in certain areas. He further submitted that the company has high research and development tradition, resulting in ideas venturing into viable software products available for commercial use. He further submitted that the company has been excluded in assessee s own case for assessment year 2012-13. 13.9 On the contrary, the DR referred to page 455 of the Annual Report compendium, which is profit and loss account of the company and page 475, which is note on Revenue Operation. According to the note on Revenue from Operations, the entire Revenue has been shown from sale of soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Thirdware solutions Ltd. 13.12 The Ld. Counsel of the assessee submitted that the assessee was engaged in diversified business operations which included software development and implementation, subscription contract and sale of user licenses for software applications and no segment information was available in respect of the different businesses streams reported in Annual Report. The Ld. Counsel submitted that only geographical segment report is available and no segment report related to different functions, is available in Annual Reports. Accordingly, the Ld. Counsel submitted that the company cannot be considered as comparable at entity level. The Ld. Counsel also submitted that the company has been excluded for providing diverse nature of services and no segments being available by the Tribunal in the case of Opera Solutions Management Consulting Services Private Limited Vs ITO (2018) 93 taxmann.com 252 ( Delhi- Trib). 13.13 On the other hand, the Ld. DR relied on the finding of the Ld. TPO of company being a good comparable, wherein he has held that software development, implementation and support services are various sub segment of software development services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO rejected the company on the ground that internal revamp /restructuring in the current year had a negative impact on the revenue growth and thus the company is not suitable comparable. According to the Ld. Counsel company is not persistence loss-making and there are no other extra ordinary event, which could be ground for excluding the company from the set of the comparables. 16. On the other hand, the Ld. DR submitted that the company is having huge amount of intangibles (₹ 76.81 crores) as compared to small amount of intangibles held by the assessee. The Ld. DR further referred to page 641 of the Annual Report compilation and submitted that the company booked a loss of ₹ 4914.50 Lakhs during the year under consideration mainly on account of ₹ 6490.90 Lakhs and ₹ 1993.63 Lakhs written off as bad debts. He referred to the reporting by the company that the unprecedented attrition witnessed by the company in the previous year has badly affected the continuity of the project. According to the Ld. DR in view of this extraordinary event also this company cannot be compared with the assessee. 17. We have heard the rival submissions and perused the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X
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